What's going on?
US industrial firm Caterpillar turned into a butterfly on Monday – it exceeded second-quarter expectations and raised its profit outlook for the year.
What does this mean?
Caterpillar ticked several boxes for investors: it’s seeing demand buoyed by a strong US economy, which is helping orders to roll in, and leading the company to almost double its quarterly profit compared to the same period last year.
But what about the tariffs that have hit other manufacturers? Well, Caterpillar’s not immune. But it thinks the higher costs will impact its business to the tune of $100-200 million for the rest of this year – chump change when you compare it to the $14 billion of sales the company made last quarter alone.
Why should I care?
For markets: Like a caterpillar becoming a butterfly, it’s all about cycles.
Caterpillar had a good first quarter, too, but told investors things were probably going to get gradually worse throughout the year, not better. This might explain why the company’s stock initially jumped. However, its shares settled to a more sedate 1% increase by the end of the day, perhaps as some investors worried about owning the shares of an industrial company at the later stages of an economic growth cycle: when a recession eventually hits, customer demand for big industrial products tends to dry up (but endures for things people generally can’t live without like energy, utilities and food products).
The bigger picture: A CAT with nine lives.
Global trade tensions have been tough on manufacturing and industrial companies in the second quarter. Caterpillar was more cat and less caterpillar, using one of its nine lives to skate past the worst of it. However, aluminum producer Alcoa was hit by higher costs, and BMW raised its prices in China to cope with new tariffs that could result in fewer sales, as potential customers are put off by a higher price tag.