Despite crushing analysts' expectations on fourth-quarter earnings and revenue, mining and construction equipment supplier Caterpillar Inc. (CAT) saw its shares fall sharply Thursday morning, Jan. 25, as European Central Bank President Mario Draghi continued his war of words on currency with U.S. Treasury Secretary Steven Mnuchin.
"The prospects of a currency war have risen with Draghi comments, which implies trade wars are possible too," William Blair & Co. global industrial infrastructure analyst Lawrence De Maria told TheStreet Friday.
Trade wars would be bad news for Caterpillar, which plays an immense role in the steel and aluminum production markets.
Shares recovered in early afternoon trade to stand fractionally higher.
Steel and aluminum have been consistent points of consternation for those following the early days of a Trump administration that has several times threatened imposing tariffs on foreign imports of the products but has yet to act.
The president did impose a 30% tariff on solar panel imports this week -- a highly anticipated move that is being viewed by some trade analysts as a screening test for a potential tariff on steel and aluminum imports.
"The exchange rate has moved in part because of endogenous reasons, namely the improvement in the economy, in part due to exogenous reasons that have to do with communication," Draghi said in Frankfurt Thursday according to a Reuters report. "But not by the ECB, but by someone else. This someone else's communication doesn't comply with the agreed terms of references."
Draghi's comments are about Steven Mnuchin's intervention at the World Economic Forum in Davos, at which he said a weaker dollar is good for U.S. trade, Reuters reported.
William Blair's De Maria said these comments, coupled with the fact that Street expectations for Caterpillar to beat consensus estimates were very high ahead of Thursday's report, are likely playing a role in the company's slumping stock price.
Caterpillar reported earnings of $2.16 per share on sales of $12.9 billion. A consensus of analysts expected earnings of $1.79 per share on $11.98 billion in revenue.
The company also provided EPS guidance of between $8.25 and $9.25, above the Street's consensus of $8.15.
According to Jefferies analyst Stephen Volkmann, the top line performance across all regions was strong, and volumes continue to impress, "which should keep the bulls happy."
But the lion's share of the higher 2018 guidance appears to come from the new lower tax rate, which was not included in many sell-side models, Volkmann wrote in a Jan. 25 research note.
"In the current environment and with the strength of the top line, markets are likely to continue to view CAT's outlook as conservative," he added. "Bottom line, share price appreciation from here will take either faster growth, above-target margins or multiple permanent expansion."
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