Daily Brief: Caterpillar Posts Better-Than-Expected Earnings, Which Tells Us More Than You’d Think

Daily Brief: Caterpillar Posts Better-Than-Expected Earnings, Which Tells Us More Than You’d Think

about 3 years ago3 mins

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Caterpillar has a certain swagger in its tracks, and it’s easy to see why: the construction equipment maker reported better-than-expected quarterly earnings on Friday.

What does this mean?

As global economies started to recover from the pandemic-driven slump last quarter, so did the essential infrastructural work that’ll get them back on their feet. Enter Caterpillar, which reported earnings that came in well ahead of analysts’ expectations. And sure, it was 22% lower than the same time the year before, but that’s a whole lot better than the 54% and 70% drops in the second and third quarters of last year.

Caterpillar stock has risen as sales declines slow

All this is important because Caterpillar’s an economic bellwether. In other words, strong demand for its equipment is generally a good sign for the global economy as a whole. And demand does seem to be on the rise – enough that the company’s expecting stronger sales this quarter than the same (coronavirus-lite) time last year.

Why should I care?

For markets: Vaccination seemed so simple on paper.

Caterpillar’s stock is a "cyclical" one, which means its fortunes are closely aligned with how the wider economy is doing. Cyclical and cheap-looking “value” stocks have been surging in the last three months, but that’s stalled in recent weeks – probably because of (yep, we’re bored of saying it too) the pandemic. After all, a full-blown economic recovery is more likely to be delayed in light of all the new variants and vaccine difficulties. Investors, then, might be waiting to see real evidence of successful vaccination campaigns before they’re willing to go all in on cyclicals like Caterpillar.

Zooming out: Oil isn’t back yet.

Caterpillar’s investors might be hoping its oil company customers – which last year suffered the double-whammy of falling demand and lower prices – will bounce back soon too. But Chevron’s latest earnings don’t bode well: America’s second-biggest oil company reported weaker-than-expected results as lockdown restrictions continued to hammer consumption of the slippery elixir.

Chevron's cash flow and capital spending are at the lowest in a decade

Keep reading for our next story...

5G-Aficionado Ericsson Reported Better-Than-Expected Earnings

Ericsson image

Ericsson reported better-than-expected earnings on Friday thanks to a particularly successful – and… wait… suspiciously coronavirus-adjacent – 5G rollout.

What does this mean?

There’s been a rush to upgrade mobile networks to new, faster 5G technology lately, which has turned Ericsson’s mobile networking equipment into the hot ticket about town. Throw in the business it’s poaching off Nokia and Huawei, and you’ve got the recipe for expectation-busting results. It’s even earning more from every sale too: the company reported a jump in its profit margin, hitting its goal two years early.

Ericsson stock
Source: Google Finance

Still, the company didn’t let itself get carried away: it opted not to up its forecasts for 2022. That’s grated on at least one activist investor, which said the company should aim higher after nailing last quarter. So now it might not matter if Ericsson beats its targets: investors like the activist will sell off their shares if it falls short of their own expectations.

Why should I care?

Zooming in: Politics and business don’t mix.

Maybe Ericsson’s right to be cautious. See, Sweden’s banned Chinese companies from building 5G networks, and those political restrictions – along with plenty of others – are hampering rival Huawei. That’s good news for Ericsson in the short term, sure, but there’s no guarantee that China – which makes up 8% of the company’s sales – won’t retaliate in kind…

The bigger picture: Europe might be wasting its opportunity.

5G networks are seen as critical infrastructure by most governments, and key to modernizing factories, transport, and healthcare. But new research out late last week showed that only a quarter of Europeans could connect to a 5G network as of September last year. That’s up from the 13% of users in 2019, but a long way off the 76% of 5G-connected Americans. As for why, it’s as simple as it is complicated: Europe’s so fragmented and its regulations so inconsistent that the return on 5G investments is a lot lower.

Percentage of the population covered by at least one LTE mobile operator
Source: ITU, Analysys Mason, GSMA 20204
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