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Caterpillar Says Tariffs May Cost It $200 Million, But That’s Fine ‘Cause They Can Always Just Raise Prices

"High-water mark?"

When last we checked on global economic bellwether and maker of giant yellow things, Caterpillar, the company was busy trying to explain a particularly unfortunate communications misstep from their Q1 earnings call.

Specifically, the company said this after reporting what was otherwise a great quarter:

And it’s often the case the first quarter got off to a slow start for projects spent. We expected targeted investments for future growth to be higher over the remaining three quarters. The outlook assumes that first quarter adjusted profit per share will be the high-water mark for the year.

See that underlined bit? Yeah, cue Elf:

Image result for elf noooo gif

You don’t ever want to say “high-water mark” on a conference call, because that’s the rough equivalent of a guidance cut.

CAT

That “oops” moment ended up pushing the stock sharply lower (see visual above) on the way to taking a bite out of the Dow, which suffered an ~800 point haircut off the overnight highs in futures that day.

CAT

Here’s what we said at the time:

It was Caterpillar that pulled the rug out, a cruelly ironic twist given how strong their quarter was. A beat and raise from a global bellwether like CAT is usually exactly what you want if you’re a bull, but let me tell you exactly what you don’t want. Exactly what you don’t want is for someone to jump on the call and say that the previous quarter “will be the high-water mark for the year,” which is exactly what they did.

Transparency is always nice, but that’s too much transparency. There are all manner of ways to say that without couching it in those terms and that one misstep was enough to turn what should have been a great day for the shares into an absolute rout.

A couple of weeks later, the company attempted to “clarify” things at the Wells Fargo Industrials Conference, when management said this:

All we meant was that we had an exceptionally strong first quarter.

Well, fast forward nearly three months and the company just reported another set of solid results, beating on both the top and bottom lines. Revenue for the period clocked in at $14 billion, ahead of consensus ($13.98 billion) and EPS was $2.97, easily beating the $2.73 estimate and coming in at the top of the range ($2.55-$2.97, according to Bloomberg).

Shares rose sharply in the premarket and it’s a good thing, because this isn’t a pretty chart:

Industrials

We’ll see if management learned anything from last quarter when it comes to not saying anything to ruin this on the call.

In the meantime, you might be wondering if Caterpillar has anything to offer when it comes to color on the prospective impact from tariffs. As it turns out, they do.

The good news is, the company is guiding higher.

“Based on outstanding results in the first half of the year and continued strength in many of our end markets, Caterpillar is again raising our profit outlook for 2018.”, CEO Jim Umpleby gushed on Monday, adding that if you’re wondering what he’s focused on, the answer is “operational excellence, cost discipline and investing for long-term profitable growth.” Thanks, Jim!

The bad news is this, on the tariffs:

Recently imposed tariffs are expected to impact material costs in the second half of the year by approximately $100 million to $200 million, and the company expects supply chain challenges to continue to pressure freight costs.

So, basically, Caterpillar is concerned about the same things a lot of other multinationals are concerned about when it comes to the trade war, namely input costs and supply chain disruptions.

But Caterpillar has got the medicine, and that medicine is higher prices for customers:

However, the company intends to largely offset these impacts through announced mid-year price increases and using the Operating & Execution Model to further drive operational excellence and structural cost discipline.

You’ve got to love how they throw that vague reference to “operational excellence” in there at the end, as though some kind of internal Six Sigma black-belting is going to be the controlling factor when it comes to mitigating the drag from the tariffs. They’re going to raise prices – period. Because that’s how this works. You either take the hit on the bottom line, or else you make customers eat it through price increases. Caterpillar is going with the latter option.

Of course that raises questions about demand, doesn’t it? It sure does! Especially in the event tariffs end up denting global growth, because you know, Caterpillar likes it when the global economy is humming along. Buried in the standard “results may vary” footnotes on the Q2 slide deck is this:

Caterpillar’s actual results may differ materially from those described or implied in our forward-looking statements based on a number of factors, including, but not limited to … international trade policies and their impact on demand for our products and our competitive position, including the imposition of new tariffs or changes in existing tariff rates.

Nothing further.

CAT Results

 

 

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