Equipment-Maker Earnings Season: How Contractors and Fleet Owners Should Read Guidance, Backlogs and Dealer Inventory

Four times a year, the companies that build the machines on your job sites tell Wall Street how business is going. Caterpillar, Deere, PACCAR, Cummins, CNH Industrial and other equipment makers report their quarterly results, and most of the headlines focus on whether profits beat expectations. For contractors, farmers and fleet owners, the headline number is the least useful part. The real value is in what these companies say about the months ahead: order backlogs, dealer inventories, pricing and lead times. Here is how to read an equipment maker's earnings report like an equipment buyer.

Guidance matters more than the quarter

The quarter that just ended is history. What moves the stock, and what tells you most about the market you buy in, is guidance: management's forecast for revenue, profit and demand in the coming quarters. GTA's explainer on how company forecasts move stocks covers why a raised or cut outlook often matters more to investors than the results themselves.

For a buyer, guidance answers practical questions. If a maker raises its sales forecast, it expects strong orders, which usually means firm prices and longer waits for popular models. If it cuts its outlook, demand is cooling, and that can bring better availability, dealer incentives and more room to negotiate.

Five things to listen for

Most of the useful detail comes out on the conference call that follows the report, when executives answer analysts' questions. The guide to what happens on an earnings call explains the format. These are the comments that matter most to equipment buyers:

• Backlog. The value of orders not yet delivered. A growing backlog means demand is outrunning production, so expect longer lead times. A shrinking backlog means the maker is catching up, and machines may be easier to get.

• Dealer inventory. When makers say dealers are holding too many machines, discounts and financing deals tend to follow. When they say inventory is lean, expect fewer deals.

• Pricing. Makers often say how much of their sales growth came from price increases. If price is doing most of the work, list prices are still rising.

• End markets. Comments about construction, farming, mining, energy and freight tell you which customers are buying. If your industry is named as weak, used equipment in your category may get cheaper.

• Production plans. Planned production cuts or shutdowns signal that the maker sees softer demand ahead.

Watch how the market reacts

Investors place bets before and after each report, and those bets carry information. Options traders price an expected move for report day, a range the market thinks the stock could travel. GTA's walkthrough of how options price a report-day swing shows how that number is calculated. If a stock moves far beyond the range after the report, investors were surprised, and the surprise usually says something real about demand.

The primer on how earnings season plays out also explains why one company's report can move the whole group. When a large equipment maker reports strong orders, rental companies, dealers and parts suppliers often move with it.

How to use it as a buyer

• Time big purchases with the cycle. If several makers report shrinking backlogs and high dealer inventory, the next few months may be a good time to negotiate. If backlogs are growing, order early.

• Check your dealer's story against the maker's. If a dealer says machines are scarce but the maker reports heavy inventory, you have room to push on price.

• Look at used values. Cooling demand for new machines tends to soften used prices a few months later.

• Have financing ready. When a good deal appears, a pre-approval lets you act before it disappears.

A signal, not a guarantee

Company forecasts can be wrong, and stock reactions can overshoot. Treat earnings season as a signal, not a guarantee, and not investment advice. For a real example, see our CNH Industrial earnings day post and the PACCAR and Cummins comparison, which covered Cummins around its report.

Be ready when the deal shows up

The best equipment deals often appear when the cycle cools, and they do not last long. BFC Equipment Loans finances construction, farm and transportation equipment, new or used, for contractors and business owners. Get pre-approved for BFC equipment financing so you can move when the timing is right.