Machinery Sector Outlook: Analyzing Caterpillar, Deere, and CNH Industrial Ahead of Quarterly Reports

As Caterpillar, Deere, and CNH Industrial prepare to announce their quarterly results, investors are closely eyeing equipment inventories for insights into demand trends in what is anticipated to be a subdued year for the sector. After a robust 2023 characterized by supply chain challenges and surging demand, U.S. machinery manufacturers are now navigating a moderation in product stocking at dealerships, prompting a need for tighter inventory management.

Oppenheimer analyst Kristen Owen underscores the significance of inventory levels, emphasizing their impact across various segments, including construction equipment, mining, and agriculture. A key concern for manufacturers is the risk of inflated inventories at dealer lots, potentially leading to price cuts to alleviate stockpiles. Stephen Volkmann of Jefferies highlights the subsequent need for manufacturers like Caterpillar to adjust production to align with demand, mitigating the risk of bloated inventories.

The Context:

Analysts characterize the current landscape as a “tale of two halves,” with Caterpillar benefiting from relatively stable demand driven by robust infrastructure spending, while Deere grapples with challenges stemming from cautious spending in the agriculture sector due to lower crop prices. Caterpillar’s inventories decreased by nearly 6% to $16.57 billion by December-end, indicating prudent inventory management. In contrast, Deere experienced a 9.5% rise in inventories to $8.94 billion by January-end, prompting the company to announce production cuts in February.

Owen emphasizes the importance of Deere’s upcoming earnings announcement, particularly in assessing the accuracy of its inventory projections and potential implications for guidance adjustments.

The Fundamentals:

Caterpillar is slated to report Q1 results with analysts anticipating a 1% rise in revenue to $16.04 billion and a 4.6% increase in per-share earnings to $5.14. CNH Industrial, reporting on May 2, is expected to see a 19% decline in Q1 revenues, primarily driven by weakness in its agriculture segment, with EPS forecasted to sharply decline to 26 cents. Deere’s fiscal Q2 earnings, set for May 16, are projected to reflect a near 17% drop in revenues and an 18% fall in EPS to $7.87.

Wall Street Sentiment:

Caterpillar’s stock has soared over the S&P 500 year-to-date, while Deere and CNH have lagged behind. Analyst ratings suggest a mixed sentiment, with Caterpillar rated as “hold” on average among 27 brokerages, while Deere garners a mix of “buy” and “hold” ratings. CNH enjoys an average “buy” rating among 18 analysts. Median price targets have remained relatively stable for all three stocks over the past month.

As the machinery sector braces for upcoming earnings reports, attention is focused on inventory dynamics and their implications for future performance. While challenges persist, particularly in the agriculture segment, cautious optimism remains, underscored by expectations of prudent inventory management and strategic adjustments to align production with demand. Investors eagerly await insights from Caterpillar, Deere, and CNH Industrial to gauge the sector’s trajectory in the months ahead.