Caterpillar (NYSE 🙂 and Honeywell International (NYSE 🙂 will wrap up a busy week of earnings as they each report Q4 2020 results on Friday, January 29 before opening. Both industrial giants are struggling to revive growth during the ongoing pandemic.
A sharp spike in coronavirus cases, the emergence of new variants and renewed lockdown measures worldwide will certainly not help end the route to industrial materials. According to analyst forecasts quoted by Bloomberg, industrial companies in this environment may not reach their 2019 revenue until 2025.
That said, a strong rally in their stock prices over the past six months shows that investors are optimistic about the global economic recovery in 2021. Both Caterpillar and Honeywell stocks are up more than 30% over that period. CAT closed at $ 180.63 on Wednesday, while Honeywell closed the day at $ 199.38.
Caterpillar Weekly Chart.
Slower construction of everything from cruise ships to pipelines during the coronavirus pandemic weighs on demand for Caterpillar, an economic clock. Caterpillar sales were 20% lower than a year earlier, especially haunted by the weak oil and gas market.
For Honeywell, the greatest hindrance comes from the aerospace industry, which is in extreme distress due to the deep-rooted problems at Boeing (NYSE 🙂 and the virus-induced air traffic collapse. In this bleak production outlook, investors have their eyes on the company's transformation into an industrial software company.
Darius Adamczyk, in his third year as CEO, is trying to transform the 135-year-old industrial giant into a company with a start-up culture. Since taking the helm of the company, he has introduced more software-based products to help customers better manage their supply chains.
Positive Catalysts
That company is growing at an annual rate of 20% and now has sales of $ 1.5 billion. Revenue for all software, including code embedded in products, is $ 4 billion, or about 11% of that. Despite the strength of its portfolio, Honeywell's business has been hit hard by the COVID-19 pandemic, which drastically weakened the aerospace unit, the largest revenue generator.
However, there are some positive catalysts for both companies that can help cope with this year's downturn. For Caterpillar, China is showing a promising recovery from the pandemic. The company expects construction demand across the industry in China to increase for the full year. In the US, homebuilders have hiked construction rates in recent months following a surge in demand for family homes.
Caterpillar, with $ 9.3 billion in cash and $ 14 billion in available liquidity at the end of the third quarter, has enough to weather this downturn.
Another factor that keeps investor interest in these two industrial giants alive is the Democrats' victory in the recent election. President Joe Biden has pledged about $ 2 trillion – mostly in federal aid – to infrastructure for four years.
"Linking a bill to green-friendly initiatives would increase its impact, as greener highways, bridges and buildings require new construction rather than upgrades," according to a recent Bloomberg analysis.
Bottom Line
Despite a surge in Caterpillar and Honeywell stock prices over the past six months, we expect a more gradual recovery than investors had hoped. We expect this to be reflected in the companies' comments about the future when they announce their earnings tomorrow, which could lead to some weakness in their stock prices.
