Despite doomy predictions that the next recession is nigh, Caterpillar Inc. (CAT) has a healthy backlog of construction and mining equipment projects that should continue to drive its business in 2019.
"The problem is the market thinks we're right on the edge of the cliff (of a recession)," said BMO Capital Markets analyst Joel Biss, who set a bullish $195 price target on the Deerfield, Ill., industrial equipment maker's stock on Monday.
Two years ago, Caterpillar began to recover from a nearly four-year sales slump. The stock is trading at 12 or 13 times yearly earnings today -- a relatively low multiple, Biss said.
"Even if my target is a little too high, based on what we can see today, it will go to $175 if we peak in the next two years," Biss said.
Caterpillar shares declined by 1.9% to $139.75 on Monday after trading up for most of the session.
Caterpillar reported earnings per share of $2.97, above consensus estimates of $2.73, and 83% above earnings per share year-over-year.
Total revenue was $14 billion, topping analysts' estimates of $11.3 billion and 9% higher than first quarter 2018.
Sales for the company's largest segment, construction equipment, were up 23%, including 43% in the Asia Pacific market, which includes China and 18% in North America.
Manufacturing costs increased about $80 million in the second quarter year-over-year, mostly because of higher freight costs due to constrained capacity in the trucking industry, said Joseph Creed, the company's interim chief financial officer.
Resource Industry segment sales were $2.5 billion in the quarter, up 38% from second quarter of 2017, driven by aftermarket parts demand to rebuild machines, Creed said.
"Our order rates and the backlog remained strong," CEO Joseph J. Umpleby said. "For certain applications, particularly in oil, gas and mining, we are taking orders for delivery well into 2019."
Amy Campbell, director of investment relations for the company, said executives feel positive that infrastructure investment in China will continue to drive purchases of excavation equipment.
"We continue to feel good about our end markets," Campbell said. " I think we continue to keep an eye on what's a pretty dynamic environment (China)."