Caterpillar Dodges the IRS Penalty as it Posts Major Earnings Win

Wall Street just shook its favorite magic eight ball and got the positive “outlook good” answer it was hoping for.

On Thursday, manufacturing equipment giant Caterpillar posted beyond stellar third-quarter earnings results, with growth coming from several key categories. Amid the victory lap, Caterpillar revealed details of a favorable settlement with the IRS, following a multi-year bout in which Uncle Sam accused the company of skimping on its tax bills to the tune of billions.

The Butterfly Effect

Just as a butterfly flapping its wings can cause a hurricane, Caterpillar’s earnings reports can rattle the entire stock market. Tractor and construction equipment sales have long been the favorite weathervane of finance junkies, and Thursday’s results are enough to hint at slowing headwinds — a fact perhaps borne out by the unexpected good news yesterday that domestic GDP inched up 2.6% in the third quarter. In other words, the economy may not be busting out of its cocoon, but we aren’t technically in a recession, either. Caterpillar’s rosy quarterly results were bolstered by its victory against the IRS, the conclusion of a yearslong saga by the federal agency to claw back $2.3 billion in allegedly dodged taxes from 2007 to 2016. The company settled for $490 million, plus another $250 million in interest — losses easily covered by a business that’s firing on all cylinders:

• Widespread fears over a stalling housing market haven’t hit Caterpillar yet, with the company saying residential demand remains elevated; meanwhile, nonresidential construction is expected to increase thanks in large part to billions of federal government dollars pouring into infrastructure projects.
• Sales of yellow construction equipment jumped nearly 20%, while mining equipment increased 20%. Overall, sales hit $15 billion this latest quarter — of which a non-immaterial $1.6 billion can be attributed directly to recent inflation-spurred price hikes.

Caterpillar played the role of contrarian when it purchased Weir Group’s oil and gas equipment business in October 2020 just a few months after oil went negative. Now, with upstream oil and gas activity surging, Caterpillar saw a 22% jump in its energy and transportation business.

Stock Success: The swell returns were enough to push Caterpillar’s share price up as much as 10% during trading, marking its largest post-earnings stock market bump since Ronald Reagan was president. Its stock is up roughly 3% so far this year, even as the broader S&P 500 has fallen nearly 20%. This summer, Caterpillar announced it is moving its headquarters from the suburbs of Chicago to the suburbs of Dallas — which may or may not have been a direct result of a butterfly somewhere flapping its gossamer wings.