By Deborah Mary Sophia
(Reuters) – Equipment inventories will be in focus when Caterpillar, Deere and CNH Industrial report quarterly results in the coming weeks, as investors await clues on demand in what is expected to be a lukewarm year for the sector.
Coming off of a strong 2023 where supply chain concerns and soaring demand prompted dealers to bulk up on tractors, combines and construction equipment, U.S. machinery makers are now seeing a moderation in product stocking at dealers, forcing them to tighten their inventories.
“I do think inventories are going to be the most important data point … whether it’s construction equipment, mining, or agricultural, just at what level are those inventories at the retail channel?” said Oppenheimer analyst Kristen Owen.
Tighter management at dealerships would require equipment manufacturers to tweak production accordingly, so they do not end up with bloated inventories that could hurt margins.
“The thing that people are most nervous about is if a lot of inventory gets built, and that isn’t going to customers and it sits on dealer lots, then there’s a temptation for dealers to cut the price to try to move it off the lot,” said Stephen Volkmann, analyst at Jefferies.
“It also means that at some point Caterpillar would have to really cut back on production in order to lower those inventory levels, and that’s the risk that people are worried about.”
THE CONTEXT
In what analysts have called a tale of two halves, demand trends at Caterpillar have been relatively more stable thanks to robust infrastructure spending, while its agriculture-focused rival Deere has taken a hit from cautious spending by farmers due to lower crop prices.
Caterpillar’s inventories decreased nearly 6% to $16.57 billion at December-end, from $17.58 billion three months prior. Deere’s inventories rose 9.5% to $8.94 billion at January-end from three months prior.
In February, Deere announced plans to cut production.
“The question for Deere’s earnings will be how prescient were they in calling out what they were seeing in terms of that inventory build, or is the build above and beyond what they were seeing at the time and now we need to take another step down on guidance,” Oppenheimer’s Owen said.
THE FUNDAMENTALS
** Caterpillar is set to report Q1 results on Thursday; Analysts expect a 1% rise in revenue to $16.04 billion, with a 4.6% rise in per-share earnings to $5.14 – LSEG
** CNH Industrial, set to report on May 2, is likely to see a 19% decline in Q1 revenues, led by weakness in its agriculture segment; EPS is expected to decline sharply to 26 cents
** Deere reports its fiscal Q2 earnings on May 16; Wall Street expects a near 17% drop in revenues and an 18% fall in EPS to $7.87
WALL STREET SENTIMENT
** Caterpillar stock has largely outperformed the S&P 500 year-to-date, while Deere and CNH have lagged
** Caterpillar is rated “hold” on average among 27 brokerages, while Deere is rated “buy” or higher by 13 and “hold” by 13; CNH has an average “buy” rating among 18 analysts
** Median price targets have largely remained the same for all three stocks over the past month
(Reporting by Deborah Sophia in Bengaluru; Editing by Devika Syamnath)
