A month has gone by since the last earnings report for Caterpillar (CAT Quick QuoteCAT - Free Report) . Shares have added about 1% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important drivers.

Caterpillar Q2 Earnings Beat Estimates, Increase Y/Y

Caterpillar reported second-quarter 2022 adjusted earnings per share of $3.18, which surpassed the Zacks Consensus Estimate of $3.00 by a margin of 6%. This compares to our estimate of $3.18 for the quarter. The bottom-line figure marked a 22% improvement year on year. Strong demand across most of its end markets and favorable price realization led to the improvement in earnings in the quarter under review despite unfavorable manufacturing costs (mainly higher material and freight costs).

Including one-time items, Caterpillar’s earnings per share was $3.13, an improvement from the prior-year quarter’s figure of $2.56.

Revenues Up Aided by All Segments

The company’s second-quarter revenues of $14.25 billion missed the Zacks Consensus Estimate of $14.3 billion. Our estimate for the quarter was $14.6 billion. However, the top line improved 10.5% from the year-ago quarter on favorable price realization and increased sales volumes. Sales volume was primarily driven by services, partially offset by lower sales of equipment to end users. Unfavorable currency impacts related to the euro, Australian dollar and Japanese yen had a dampening effect. Sales increased across all of its three segments.

Inflated Costs Weigh on Margins

In the quarter under review, cost of sales increased 12.3% year over year to around $10 billion. Manufacturing costs were higher in the quarter due to inflated material costs and freight costs. Gross profit improved 7% year over year to $4.3 billion. Gross margin was 30% in the quarter under review, down from 31.1% in the prior-year quarter.

Selling, general and administrative (SG&A) expenses increased 4.5% year over year to around $1.42 billion. Research and development (R&D) expenses climbed 7.6% to $480 million. Both SG&A and R&D expenses in the quarter were up year over year due to investments associated with the company's strategy for profitable growth.

Operating profit in the quarter rose 8.7% year over year to $1.94 billion. Gains from increased volumes and favorable price realization offset the impact of inflated manufacturing costs as well as higher SG&A and R&D expenses. Adjusted operating margin was 13.6% in the reported quarter, down from 13.9% in the prior-year quarter.

Segment Performances

Machinery and Energy & Transportation (ME&T) sales rose 11% year over year to $13.5 billion in the quarter under review. Construction Industries' sales were up 7% year over year to $6 billion on favorable price realization, somewhat offset by unfavorable currency impacts. Sales volume dipped slightly year on year as lower sales of equipment to end users were mostly offset by higher sales of aftermarket parts. Sales growth in other Latin America and North America helped offset lower sales in EAME and Asia Pacific.

Sales at Resource Industries gained 16% year over year to around $2.96 billion on higher sales volume, backed by higher end-user demand for aftermarket parts and improved price realization. Sales were up in Asia Pacific and North America, which negated year-on-year declines witnessed in EAME and Latin America.

Sales of the Energy & Transportation segment in the quarter were around $5.7 billion, reflecting growth of 15% from the prior-year quarter as sales were up in all applications.

The ME&T segment reported an operating profit of $1,804 million, which reflected an improvement of 9% year over year. The Construction Industries segment witnessed a 4% decline in operating profit to $989 million. Favorable price realization was offset by higher manufacturing costs and lower sales volumes.

The Resource Industries segment’s operating profit improved 2% year over year to $355 million in the second quarter as higher sales volume and favorable price realization offset the impact of higher manufacturing costs. The Energy & Transportation segment’s operating profit slumped 11% year over year to $659 million as increasing manufacturing and SG&A/R&D expenses negated gains from higher sales volumes and price realization.

Financial Products’ total revenues climbed 3% to $798 million from the prior-year quarter. The segment's profits were $217 million in the reported quarter — an 11% drop year on year.

Cash Position

In the first half of 2022, Caterpillar’s operating cash flow was $2.55 billion compared with $4.05 billion in the prior-year comparable period. The company returned $1.7 billion to shareholders through dividends and share repurchases throughout the quarter, ending the quarter with cash and equivalents of $6 billion.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

Currently, Caterpillar has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, 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 downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Caterpillar has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.