Caterpillar stock has slumped: can earnings spark a rebound?

Caterpillar stock has pulled back substantially, moving from the year-to-date high of $1,073 to the current $809. It has dropped in the past six consecutive weeks, its longest streak in years. This article explores whether the CAT stock will continue its strong downtrend as its earnings loom.

Caterpillar stock has dived ahead of earnings

CAT shares have been in a strong freefall in the past few weeks as investors have dumped the top AI winners. 

While Caterpillar is known for its large machines, it has also become a big name in the artificial intelligence industry because of its power generation business, which has become its fastest-growing one. Its generators are used widely across data centers in the United States and other countries.

The most recent results showed that Caterpillar’s power and energy segment made over $7 billion in sales, up by 22% from the same period last year. Its profit jumped to $1.45 billion, while its profit increased $162 million. 

This business will likely continue growing in the foreseeable future as large technology companies have hinted that they will continue spending. Alphabet, the parent company of Google and YouTube, announced that it would spend over $205 billion in spending. 

Microsoft, Oracle, OpenAI, and Tesla are also continuing their spending, which will lead to more demand for power equipment over time. 

The construction segment also grew substantially in the first quarter, hitting $7.2 billion from $5.2 billion in the same period last year. Its segment profit jumped to $1.5 billion. 

The resource segment, which provides equipment used in the mining industry, made $3.8 billion in revenue, while its profit dropped to $378 million. In total, Caterpillar ended the quarter with a record revenue backlog of $63 billion, a 79% annual increase.

Looking ahead, Caterpillar stock will next react to the upcoming earnings, with analysts expecting its revenue growth to continue. The average estimate among analysts is that its revenue grew by 16% in the second quarter to $19.2 billion. For the year, analysts expect the revenue figure to come in at $76.6 billion, up by 13% YoY. Caterpillar’s earnings per share is expected to move from $4.72 last year to $6.2. 

The company faces some major challenges. For one, it is highly overvalued, with the forward price-to-earnings ratio being 32. It has remained above other popular companies like Micron and Nvidia. 

At the same time, there is a risk that the company will struggle as investors start rotating from AI winners to companies that have struggled.

CAT stock price technical analysis

Caterpillar stock chart | Source: TradingView

The daily chart shows that the Caterpillar share price has been in a strong sell-off in the past few weeks, as we predicted. It has dropped from the year-to-date high of $1,073 to the current $840. It remains above the important support level of $765, the 38.2% Fibonacci Retracement level. 

The stock has also found support at the 200-day Exponential Moving Average (EMA), while the Relative Strength Index (RSI) moved to 40. Therefore, the stock will likely be highly volatile after its earnings. The options market suggests that investors are positioning to the upside, with the put/call option of 0.95, suggesting an upside.