October dashed whatever little hope of recovery that investors in Caterpillar Inc. (CAT 0.69%) had. Shares of the heavy-equipment maker plummeted 20.4% last month, according to data provided by S&P Global Market Intelligence, even hitting 52-week lows on Oct. 23. The stock is up 4% so far in November, as of this writing, but continues to be volatile
While macro concerns were already weighing down the stock, Caterpillar's third-quarter earnings report knocked nearly 10% off the stock on the morning of the release. Interestingly, Caterpillar not only reported a solid set of numbers but also upgraded its guidance on GAAP earnings per share. So why did the stock tumble? Investor expectations are partly to blame.
China is an important market for Caterpillar, so when that nation reported its slowest growth numbers in nearly a decade in mid-October, it didn't sit well with investors. This came at a time when the market was already struggling to get its head around the potential impact of tariffs and a trade war on the company's bottom line.
Given the backdrop, strong Q3 numbers should have come as a relief for shareholders, but that was not to be. Caterpillar's sales surged 18% year over year and EPS jumped nearly 63%, clocking what the company called its "best third-quarter profit" in its history. Management also boosted its full-year profit outlook by about a percentage point at the midpoint to $10.65 to $11.65 per share.
The market wasn't happy, though, for several reasons. First, the profit boost was a result of a tax benefit and not operational improvement. Second, Caterpillar's numbers confirmed that tariffs are driving the company's costs higher. Third, Caterpillar reiterated its adjusted EPS guidance of $11 to $12 for the full year, which seemingly hinted that the company's earnings growth has, perhaps, peaked after two consecutive quarters of outlook upgrades.
Investors in the know understand that Caterpillar is a cyclical stock, and geopolitical concerns can cause unexpected volatility. From an operational standpoint, there's no denying that the company is far better-placed today than it was a year ago, but to expect it'll continue to grow at an exceptional pace quarter after quarter is a fallacy. The quality of Caterpillar's earnings hasn't deteriorated ... its business environment might have.