Caterpillar Earnings Miss Puts Homebuilder ETFs on Watch

Equipment manufacturer Caterpillar disappointed with its second-quarter earnings on Wednesday, citing the U.S.-China trade wars as the primary reason for higher costs affecting the company’s bottom line. This puts homebuilder exchange-traded funds (ETFs) on watch as sector weakness could result.

Caterpillar earned $2.83 per share during the second quarter, which fell below consensus estimates of $3.12 per share, according to Refinitiv. Revenue didn’t fare any better with $14.432 billion reported versus the $14.435 billion Wall Street analysts expected, according to Refinitiv.

 Additionally, Caterpillar also lowered full-year earnings guidance to be at the lower end of the previous range of $12.06 to $13.06, which was less than the estimate of $12.24 per share. Nonetheless, the heavy equipment manufacturer maintained that future growth prospects were favorable.

“We have the right strategy in place to deliver long-term profitable growth through our continued focus on strategic investments, including growing services and expanding offerings. We will also continue to focus on driving operational excellence including a flexible and competitive cost structure,” said Caterpillar Chairman and CEO Jim Umpleby in a statement.

“Sales and revenues increased this quarter, including a record performance from Construction Industries,which reflected our strong competitive position globally,” Umpleby added. “Our strong operating cash flow in the quarter allowed us to repurchasesharesand paydividendsof about $1.9 billion. This is in line with our intention to return substantially all free cash flow to shareholders.”

ETFs to watch moving forward include the the iShares US Home Construction ETF (BATS: ITB) and SPDR S&P Homebuilders ETF (NYSEArca: XHB). Leveraged plays on home builder stocks include the bullish Direxion Daily Homebuilders and Supplies Bull and Bear 3X Shares (NYSEArca: NAIL), which attempts to deliver triple the daily returns of the Dow Jones U.S. Select Home Construction Index.

Lower mortgage rates could give the housing market a much needed boost, which could translate to more strength for homebuilders. Rising rates, low affordability and rising homebuilder costs due to tariffs have been thorns in the side for the housing market.

This year, the central bank has been keen to keep interest rates unchanged. In addition, the central bank alluded to possible rate cuts for the rest of 2019.

Once again, however, the rising costs of supplies could keep home prices rising, but that could be tempered if the current labor market remains robust.

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