Data source: Caterpillar financials. Chart by author.
Q1 was clearly an exceptionally strong quarter, with margins from Caterpillar's construction-and-mining equipment (resource industries) businesses climbing at a better-than-expected clip to top the company's own long-term targets, thanks mainly to strong sales volumes and higher prices. It's therefore unfair to blame Caterpillar for not expecting the trend to continue. However, not once did management hint at a slowdown in sales or profits, and it's the market's fault to have assumed the extraordinary pace of growth in the first quarter as a new normal for Caterpillar.
What this means for Caterpillar investors
It's important to understand that Caterpillar's top- and bottom-line growth in recent quarters is still coming off a low base as its earnings cycle started to reverse course only in 2017, which is why the company has consistently topped analysts' quarterly estimates by big margins. Caterpillar's fiscal 2018 guidance of GAAP EPS of $9.75 to $10.75 compared with its prior-year earnings of only $1.26 per share explains what I mean by coming off a low base.
Obviously, this pace of growth is not sustainable, and it will likely normalize with time. What matters is the trend in Caterpillar's sales, the best gauge for which, perhaps, is the worldwide retail machinery sales statistics for the previous quarter, which the company releases every month. The chart below shows how Caterpillar's retail sales picked up slack last year and continue to grow at solid double-digit rates.