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How to Play Caterpillar (CAT) Stock Ahead of Q2 Earnings?
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Caterpillar Inc. (CAT - Free Report) is anticipated to record top and bottom-line declines when it reports second-quarter 2024 results on Aug 6, before the opening bell.
The Zacks Consensus Estimate for second-quarter 2024 earnings has moved down 1% over the past 30 days to $5.53 per share. The consensus mark implies a 0.4% dip from the year-ago actual. The Zacks Consensus Estimate for revenues is pegged at $16.76 billion, suggesting a 3.2% year-over-year decline.
Image Source: Zacks Investment Research
Solid Earnings Surprise History
Caterpillar’s earnings outpaced the Zacks Consensus Estimates in the trailing four quarters, the average surprise being 14.6%. This is depicted in the following chart.
Image Source: Zacks Investment Research
What the Zacks Model Unveils
Our proven model does not conclusively predict an earnings beat for Caterpillar this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that is not the case here.
Earnings ESP: CAT has an Earnings ESP of -2.16%. You can uncover the best stocks before they are reported with our Earnings ESP Filter.
The Institute for Supply Management’s manufacturing index was below 50% in the April-June period, which indicates contraction. The New Orders Index also stayed below 50 as companies refrained from making capital investments. The impacts of this trend are expected to get reflected in Caterpillar’s second-quarter order levels. However, CAT’s substantial backlog of $27.59 billion at the beginning of the quarter, and higher aftermarket parts and service-related revenues are likely to have supported its top-line performance.
Dealer inventory of machines is expected to have declined in the second quarter, in line with normal seasonal trends. Lower sales volumes, offset by favorable pricing, are expected to have led to the overall decline in revenues. The company has been witnessing higher costs for raw materials and freight services. However, there has been a moderation of input cost inflation lately.
We expect the company’s cost of sales to decline 4.2% in the second quarter as favorable freight is expected to have offset the impacts of unfavorable cost absorption. We also anticipate increased SG&A and R&D expenses related to strategic investments, although this is likely to have been offset by lower short-term incentive compensation. We expect SG&A expenses to increase 13.7% and R&D expenses to rise 6.4% in the second quarter.
Savings from Caterpillar’s cost-control measures and restructuring actions are likely to have negated some of these setbacks. Our model projects a modest 2.6% year-over-year decrease in operating income to $3.6 billion and an operating margin of 21.3%, implying no change from that reported in the second quarter of 2023.
Here’s How Segments are Expected to Perform in Q2
Our model projects the Resource Industries segment's external sales at $3.4 billion for the second quarter, indicating a 2.4% year-over-year decline. We expect a 6% dip in volume for the segment, partially offset by a 4% increase in pricing. The projection for lower volumes primarily reflects the ongoing weakness in off-highway and articulated trucks, and the decline in dealer inventories.
The segment is expected to report an operating profit of $722 million, suggesting a 2% year-over-year decline. The segment’s operating margin is projected to be 21.3%, indicating an in-line performance with the second-quarter 2023 reported figure.
The Construction segment’s external sales are projected at $6.8 billion, indicating a decline of 4.7% from the year-ago quarter’s actual, mainly driven by a 5.9% dip in volume, partially offset by 1.5% pricing growth. While demand in both non-residential and residential construction in North America is expected to have been favorable, weak demand in the Asia Pacific and Europe is expected to have weighed on volumes. The above-10-ton excavator market in China has been impacted due to the slowdown in its real estate industry. Changes in dealer inventory are also expected to have acted as a headwind in the quarter.
The Construction segment’s operating profit is projected to be $1.7 billion, indicating a year-over-year decline of 4.9%. We project the segment’s margins to be 25.3%, implying no change from the year-ago quarter’s actual.
For the Energy & Transportation segment, we expect external sales to be consistent with the $5.96 billion reported in the year-ago quarter. Volume growth is projected to be 0.7%, reflecting the improved demand across Oil & Gas, Power Generation, and Transportation, offset by weak demand in industrial. Pricing is expected to contribute 0.6% to the segment’s sales growth.
The consensus estimate for the segment’s operating profit is pegged at $1.3 billion for the second quarter of 2024, suggesting 2% year-over-year growth. The operating margin is projected to be 21.7% for the second quarter, indicating a slight rise from 21.3% reported in the prior-year quarter.
Price Performance & Valuation
Caterpillar has appreciated 20.4% in the past year, outperforming its industry’s 16.7% growth. Meanwhile, the company has outpaced the broader Zacks Industrial Products sector’s 12.2% growth but lagged the S&P 500’s climb of 20.9%.
CAT’s One Year Price Performance Against Industry & Broader Market
Image Source: Zacks Investment Research
The stock’s performance has been upbeat compared with its peers. Shares of Komatsu (KMTUY - Free Report) have risen 0.9%, whereas Astec Industries (ASTE - Free Report) and Terex (TEX - Free Report) have witnessed declines of 34.2% and 0.8%, respectively, in the same period.
CAT is currently trading at a forward 12-month P/E of 15.50, at a premium compared with the industry’s 14.54X. The stock is also not cheap when compared with Komatsu, Terex and Astec, all of which are currently trading below the industry.
Image Source: Zacks Investment Research
Investment Thesis
Caterpillar’s long-term demand prospects are positive, supported by infrastructure spending and energy-transition trends, and focus on growing service revenues, which generate higher margins. Its global footprint, competitive cost position, focus on innovation and ability to ramp up production position CAT well to ride on market opportunities. A strong financial position enables it to invest in its businesses, and return cash to shareholders through share buybacks and dividend payments, with higher yield and payout ratio than peers. However, the ongoing weakness in the 10-ton and above excavator market in China, which had been one of its largest markets previously, remains concerning.
Conclusion
Caterpillar's performance is closely watched by investors, as it serves as a key economic indicator for the sector. In second-quarter 2024, the impacts of weaker volumes, and elevated SG&A and R&D expenses are expected to have offset gains from higher pricing and favorable manufacturing costs. If the company’s earnings decline as expected, it would put an end to its enviable stint of positive earnings growth for the past 13 straight quarters. This run had demonstrated CAT’s resilience amid significant challenges, including the pandemic, supply-chain disruptions and prolonged contraction in the manufacturing sector.
No matter how the upcoming quarterly results play out, investors who already hold CAT shares should continue to retain the stock in their portfolios to benefit from its solid long-term fundamentals. However, given its premium valuation, new investors can wait for a better entry point.
Image: Bigstock
How to Play Caterpillar (CAT) Stock Ahead of Q2 Earnings?
Caterpillar Inc. (CAT - Free Report) is anticipated to record top and bottom-line declines when it reports second-quarter 2024 results on Aug 6, before the opening bell.
The Zacks Consensus Estimate for second-quarter 2024 earnings has moved down 1% over the past 30 days to $5.53 per share. The consensus mark implies a 0.4% dip from the year-ago actual. The Zacks Consensus Estimate for revenues is pegged at $16.76 billion, suggesting a 3.2% year-over-year decline.
Solid Earnings Surprise History
Caterpillar’s earnings outpaced the Zacks Consensus Estimates in the trailing four quarters, the average surprise being 14.6%. This is depicted in the following chart.
What the Zacks Model Unveils
Our proven model does not conclusively predict an earnings beat for Caterpillar this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that is not the case here.
Earnings ESP: CAT has an Earnings ESP of -2.16%. You can uncover the best stocks before they are reported with our Earnings ESP Filter.
Zacks Rank: The company currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Factors Likely to Shape Overall Q2 Results
The Institute for Supply Management’s manufacturing index was below 50% in the April-June period, which indicates contraction. The New Orders Index also stayed below 50 as companies refrained from making capital investments. The impacts of this trend are expected to get reflected in Caterpillar’s second-quarter order levels. However, CAT’s substantial backlog of $27.59 billion at the beginning of the quarter, and higher aftermarket parts and service-related revenues are likely to have supported its top-line performance.
Dealer inventory of machines is expected to have declined in the second quarter, in line with normal seasonal trends. Lower sales volumes, offset by favorable pricing, are expected to have led to the overall decline in revenues.
The company has been witnessing higher costs for raw materials and freight services. However, there has been a moderation of input cost inflation lately.
We expect the company’s cost of sales to decline 4.2% in the second quarter as favorable freight is expected to have offset the impacts of unfavorable cost absorption. We also anticipate increased SG&A and R&D expenses related to strategic investments, although this is likely to have been offset by lower short-term incentive compensation. We expect SG&A expenses to increase 13.7% and R&D expenses to rise 6.4% in the second quarter.
Savings from Caterpillar’s cost-control measures and restructuring actions are likely to have negated some of these setbacks. Our model projects a modest 2.6% year-over-year decrease in operating income to $3.6 billion and an operating margin of 21.3%, implying no change from that reported in the second quarter of 2023.
Here’s How Segments are Expected to Perform in Q2
Our model projects the Resource Industries segment's external sales at $3.4 billion for the second quarter, indicating a 2.4% year-over-year decline. We expect a 6% dip in volume for the segment, partially offset by a 4% increase in pricing. The projection for lower volumes primarily reflects the ongoing weakness in off-highway and articulated trucks, and the decline in dealer inventories.
The segment is expected to report an operating profit of $722 million, suggesting a 2% year-over-year decline. The segment’s operating margin is projected to be 21.3%, indicating an in-line performance with the second-quarter 2023 reported figure.
The Construction segment’s external sales are projected at $6.8 billion, indicating a decline of 4.7% from the year-ago quarter’s actual, mainly driven by a 5.9% dip in volume, partially offset by 1.5% pricing growth. While demand in both non-residential and residential construction in North America is expected to have been favorable, weak demand in the Asia Pacific and Europe is expected to have weighed on volumes. The above-10-ton excavator market in China has been impacted due to the slowdown in its real estate industry. Changes in dealer inventory are also expected to have acted as a headwind in the quarter.
The Construction segment’s operating profit is projected to be $1.7 billion, indicating a year-over-year decline of 4.9%. We project the segment’s margins to be 25.3%, implying no change from the year-ago quarter’s actual.
For the Energy & Transportation segment, we expect external sales to be consistent with the $5.96 billion reported in the year-ago quarter. Volume growth is projected to be 0.7%, reflecting the improved demand across Oil & Gas, Power Generation, and Transportation, offset by weak demand in industrial. Pricing is expected to contribute 0.6% to the segment’s sales growth.
The consensus estimate for the segment’s operating profit is pegged at $1.3 billion for the second quarter of 2024, suggesting 2% year-over-year growth. The operating margin is projected to be 21.7% for the second quarter, indicating a slight rise from 21.3% reported in the prior-year quarter.
Price Performance & Valuation
Caterpillar has appreciated 20.4% in the past year, outperforming its industry’s 16.7% growth. Meanwhile, the company has outpaced the broader Zacks Industrial Products sector’s 12.2% growth but lagged the S&P 500’s climb of 20.9%.
CAT’s One Year Price Performance Against Industry & Broader Market
Image Source: Zacks Investment Research
The stock’s performance has been upbeat compared with its peers. Shares of Komatsu (KMTUY - Free Report) have risen 0.9%, whereas Astec Industries (ASTE - Free Report) and Terex (TEX - Free Report) have witnessed declines of 34.2% and 0.8%, respectively, in the same period.
CAT is currently trading at a forward 12-month P/E of 15.50, at a premium compared with the industry’s 14.54X. The stock is also not cheap when compared with Komatsu, Terex and Astec, all of which are currently trading below the industry.
Investment Thesis
Caterpillar’s long-term demand prospects are positive, supported by infrastructure spending and energy-transition trends, and focus on growing service revenues, which generate higher margins. Its global footprint, competitive cost position, focus on innovation and ability to ramp up production position CAT well to ride on market opportunities. A strong financial position enables it to invest in its businesses, and return cash to shareholders through share buybacks and dividend payments, with higher yield and payout ratio than peers. However, the ongoing weakness in the 10-ton and above excavator market in China, which had been one of its largest markets previously, remains concerning.
Conclusion
Caterpillar's performance is closely watched by investors, as it serves as a key economic indicator for the sector. In second-quarter 2024, the impacts of weaker volumes, and elevated SG&A and R&D expenses are expected to have offset gains from higher pricing and favorable manufacturing costs. If the company’s earnings decline as expected, it would put an end to its enviable stint of positive earnings growth for the past 13 straight quarters. This run had demonstrated CAT’s resilience amid significant challenges, including the pandemic, supply-chain disruptions and prolonged contraction in the manufacturing sector.
No matter how the upcoming quarterly results play out, investors who already hold CAT shares should continue to retain the stock in their portfolios to benefit from its solid long-term fundamentals. However, given its premium valuation, new investors can wait for a better entry point.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.