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Caterpillar (CAT) Up 3.4% Since Last Earnings Report: Can It Continue?
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A month has gone by since the last earnings report for Caterpillar (CAT - Free Report) . Shares have added about 3.4% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Caterpillar due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Caterpillar Q2 Earnings Top Estimates on Favorable Pricing
Caterpillar reported second-quarter 2024 adjusted earnings per share of a record $5.99, which beat the Zacks Consensus Estimate of $5.53 by a margin of 8.3%. The bottom-line figure marked an 8% year-over-year improvement.
Favorable price realization and manufacturing costs and improved profit in the Energy & Transportation segment, mainly led to the improvement in CAT’s earnings. The company witnessed volume declines in its segments mainly attributed to changes in dealer inventories.
Including one-time items, Caterpillar’s earnings per share were $5.48, down 3% from $5.67 in the year-ago quarter.
Revenues Dip as Low Volumes Offset Prices
The company reported second-quarter revenues of around $16.69 billion, which missed the Zacks Consensus Estimate of $16.76 billion by a slight margin of 0.4%. The top line was 3.6% lower than the year-ago quarter as favorable price realization was offset by lower volumes reflecting changes in dealer inventories.
Improved results in the Energy & Transportation segment were offset by weaker performances in the Construction Industries and Resource Industries segments. Latin America and North America witnessed 5% and 1% year-over-year improvement, respectively, in sales. This was offset by a 16% sales decline in EAME and a 9% drop in sales in Asia Pacific.
Favorable Manufacturing Costs, Prices Aid Adjusted Margin Expansion
In the quarter under review, the cost of sales decreased 8% year over year to $10.2 billion. Gross profit improved 4.6% year over year to $6.5 billion on favorable manufacturing costs mainly due to lower freight costs. The gross margin was 39.2%, a 310 basis point expansion from 36.1% in the year-ago quarter.
Selling, general and administrative (SG&A) expenses increased 8% year over year to around $1.65 billion. Research and development (R&D) expenses were up 1.3% to $535 million. This was mainly due to CAT’s ongoing investments aligned with strategic initiatives.
CAT reported an operating profit of around $3.5 billion in the second quarter, a 4.7% decline from the year-ago quarter. Favorable price realization offset by lower volumes, in addition to higher restructuring costs and increased SG&A and R&D expenses, led to lower profits. The operating margin was 20.9%, down from 21.1% in the year-ago quarter.
Restructuring costs increased due to the divestiture of two non-U.S. entities. Excluding this, adjusted operating profit was $3.74 billion in the quarter, up 1.5% from $3.68 billion in the year-ago quarter as favorable price realization and manufacturing costs offset elevated SG&A and R&D expenses and lower volumes. The second-quarter adjusted operating margin was 22.4% compared with 21.3% in the year-ago quarter.
Segment Performances
Machinery and Energy & Transportation (ME&T) sales dipped 4.3% year over year to around $15.8 billion in the second quarter.
Construction Industries' sales were down 7% year over year to $6.68 billion on lower sales volume (due to changes in dealer inventories), somewhat offset by favorable price realization. Sales were up 20% in Latin America, remained flat in North America, plunged 27% in EAME and declined 15% in Asia Pacific.The segment reported a volume decline of 8.3% and a favorable price impact of 2.5%.
Sales in the Resource Industries segment were down 10% year over year to around $3.2 billion. Lower volumes, mainly due to changes in dealer inventories, offset favorable price realization. Sales were down 15% in EAME and 12% in Asia/Pacific. Sales were down 10% in North America and 3% in Latin America compared with the year-ago quarter. The segment reported a 13.7% decline in volume, which was somewhat offset by a 3.8% favorable impact from pricing.
Sales of the Energy & Transportation segment were around $7.3 billion, reflecting growth of 2%, driven by favorable price realization, while volume dipped. The segment reported sales growth in Power Generation (15%), Oil and Gas (4%) and Transportation (7%), which was offset by a 21% decline in sales to the Industrial sector.
The segment reported a 2.2% decline in volumes while pricing improved 4.4%. The ME&T segment reported an operating profit of $3.66 billion, which reflected an increase of 3% year over year. The improvement was mainly led by the Energy & Transportation segment, which reported a 20% year-over-year increase in operating profit to $1.52 billion. The Construction Industries segment’s operating profit dipped 3% year over year to $1.74 billion. The Resource Industries segment’s operating profit was down 3% year over year to $0.7 billion.
Financial Products’ total revenues climbed 9% to $1 billion from the year-ago quarter due to higher average financing rates across all regions and increased average earning assets in North America. The segment reported an operating profit of $227 million compared with $240 million in the second quarter of 2023.
Cash Position
Operating cash flow was $3 billion for the second quarter. This brings Caterpillar’s operating cash flow for the first half of 2024 to around $5.1 billion compared with $4.8 billion in the year-ago comparable period. Through the first half of 2024, the company returned $7.6 billion to shareholders as dividends and share repurchases. CAT ended the quarter with cash and equivalents of around $4.3 billion, lower than the cash holding of around $7 billion at 2023-end. Expectations for Q3 & 2024
The company anticipates sales in the third quarter to be lower than last year’s quarter. Dealer inventories of machines will be flat or dip slightly. Machine sales to end users will be lower compared with a stronger third quarter of 2023. Adjusted operating margin will be similar to the year-ago quarter. CAT had reported revenues of $16.8 billion and an adjusted operating margin of 20.8% in the third quarter of 2023.
Caterpillar expects revenues in 2024 to be slightly lower than the record 2023 revenues of $67 billion. Adjusted operating profit margin is expected to be above the company’s target range corresponding to the expected level of revenues. Both adjusted operating profit and earnings per share are likely to be higher than previous expectations. Caterpillar expects ME&T free cash flow to be in the top half of its targeted range between $7.5 billion and $10 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review.
VGM Scores
Currently, Caterpillar has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Caterpillar has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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Caterpillar (CAT) Up 3.4% Since Last Earnings Report: Can It Continue?
A month has gone by since the last earnings report for Caterpillar (CAT - Free Report) . Shares have added about 3.4% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Caterpillar due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Caterpillar Q2 Earnings Top Estimates on Favorable Pricing
Caterpillar reported second-quarter 2024 adjusted earnings per share of a record $5.99, which beat the Zacks Consensus Estimate of $5.53 by a margin of 8.3%. The bottom-line figure marked an 8% year-over-year improvement.
Favorable price realization and manufacturing costs and improved profit in the Energy & Transportation segment, mainly led to the improvement in CAT’s earnings. The company witnessed volume declines in its segments mainly attributed to changes in dealer inventories.
Including one-time items, Caterpillar’s earnings per share were $5.48, down 3% from $5.67 in the year-ago quarter.
Revenues Dip as Low Volumes Offset Prices
The company reported second-quarter revenues of around $16.69 billion, which missed the Zacks Consensus Estimate of $16.76 billion by a slight margin of 0.4%. The top line was 3.6% lower than the year-ago quarter as favorable price realization was offset by lower volumes reflecting changes in dealer inventories.
Improved results in the Energy & Transportation segment were offset by weaker performances in the Construction Industries and Resource Industries segments. Latin America and North America witnessed 5% and 1% year-over-year improvement, respectively, in sales. This was offset by a 16% sales decline in EAME and a 9% drop in sales in Asia Pacific.
Favorable Manufacturing Costs, Prices Aid Adjusted Margin Expansion
In the quarter under review, the cost of sales decreased 8% year over year to $10.2 billion. Gross profit improved 4.6% year over year to $6.5 billion on favorable manufacturing costs mainly due to lower freight costs. The gross margin was 39.2%, a 310 basis point expansion from 36.1% in the year-ago quarter.
Selling, general and administrative (SG&A) expenses increased 8% year over year to around $1.65 billion. Research and development (R&D) expenses were up 1.3% to $535 million. This was mainly due to CAT’s ongoing investments aligned with strategic initiatives.
CAT reported an operating profit of around $3.5 billion in the second quarter, a 4.7% decline from the year-ago quarter. Favorable price realization offset by lower volumes, in addition to higher restructuring costs and increased SG&A and R&D expenses, led to lower profits. The operating margin was 20.9%, down from 21.1% in the year-ago quarter.
Restructuring costs increased due to the divestiture of two non-U.S. entities. Excluding this, adjusted operating profit was $3.74 billion in the quarter, up 1.5% from $3.68 billion in the year-ago quarter as favorable price realization and manufacturing costs offset elevated SG&A and R&D expenses and lower volumes. The second-quarter adjusted operating margin was 22.4% compared with 21.3% in the year-ago quarter.
Segment Performances
Machinery and Energy & Transportation (ME&T) sales dipped 4.3% year over year to around $15.8 billion in the second quarter.
Construction Industries' sales were down 7% year over year to $6.68 billion on lower sales volume (due to changes in dealer inventories), somewhat offset by favorable price realization. Sales were up 20% in Latin America, remained flat in North America, plunged 27% in EAME and declined 15% in Asia Pacific.The segment reported a volume decline of 8.3% and a favorable price impact of 2.5%.
Sales in the Resource Industries segment were down 10% year over year to around $3.2 billion. Lower volumes, mainly due to changes in dealer inventories, offset favorable price realization. Sales were down 15% in EAME and 12% in Asia/Pacific. Sales were down 10% in North America and 3% in Latin America compared with the year-ago quarter. The segment reported a 13.7% decline in volume, which was somewhat offset by a 3.8% favorable impact from pricing.
Sales of the Energy & Transportation segment were around $7.3 billion, reflecting growth of 2%, driven by favorable price realization, while volume dipped. The segment reported sales growth in Power Generation (15%), Oil and Gas (4%) and Transportation (7%), which was offset by a 21% decline in sales to the Industrial sector.
The segment reported a 2.2% decline in volumes while pricing improved 4.4%.
The ME&T segment reported an operating profit of $3.66 billion, which reflected an increase of 3% year over year. The improvement was mainly led by the Energy & Transportation segment, which reported a 20% year-over-year increase in operating profit to $1.52 billion. The Construction Industries segment’s operating profit dipped 3% year over year to $1.74 billion. The Resource Industries segment’s operating profit was down 3% year over year to $0.7 billion.
Financial Products’ total revenues climbed 9% to $1 billion from the year-ago quarter due to higher average financing rates across all regions and increased average earning assets in North America. The segment reported an operating profit of $227 million compared with $240 million in the second quarter of 2023.
Cash Position
Operating cash flow was $3 billion for the second quarter. This brings Caterpillar’s operating cash flow for the first half of 2024 to around $5.1 billion compared with $4.8 billion in the year-ago comparable period. Through the first half of 2024, the company returned $7.6 billion to shareholders as dividends and share repurchases. CAT ended the quarter with cash and equivalents of around $4.3 billion, lower than the cash holding of around $7 billion at 2023-end.
Expectations for Q3 & 2024
The company anticipates sales in the third quarter to be lower than last year’s quarter. Dealer inventories of machines will be flat or dip slightly. Machine sales to end users will be lower compared with a stronger third quarter of 2023. Adjusted operating margin will be similar to the year-ago quarter. CAT had reported revenues of $16.8 billion and an adjusted operating margin of 20.8% in the third quarter of 2023.
Caterpillar expects revenues in 2024 to be slightly lower than the record 2023 revenues of $67 billion. Adjusted operating profit margin is expected to be above the company’s target range corresponding to the expected level of revenues. Both adjusted operating profit and earnings per share are likely to be higher than previous expectations. Caterpillar expects ME&T free cash flow to be in the top half of its targeted range between $7.5 billion and $10 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review.
VGM Scores
Currently, Caterpillar has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Caterpillar has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.