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Why Is Caterpillar (CAT) Up 7.6% Since Last Earnings Report?

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It has been about a month since the last earnings report for Caterpillar (CAT - Free Report) . Shares have added about 7.6% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Caterpillar Q3 Earnings & Revenues Beat, Rise Y/Y

Caterpillar reported adjusted earnings per share of $5.52 in the third quarter of 2023, which beat the Zacks Consensus Estimate of adjusted earnings per share of $4.75 by a margin of 16%. The bottom-line figure marked a 39.7% year-over-year improvement. Despite unfavorable costs, higher sales volumes in the Energy & Transportation and Construction Industries segments, and favorable price realization led to the improvement in CAT’s earnings for the quarter.

Including one-time items, Caterpillar’s earnings per share were $5.45, up 41% from the prior-year quarter’s $3.87.

Revenues Up on Favorable Price Realization

The company reported third-quarter revenues of around $16.8 billion, which surpassed the Zacks Consensus Estimate of $16.6 billion. The top line improved 12% from the year-ago quarter, aided by higher sales volumes in the Energy & Transportation and Construction Industries segments and favorable price realization in all the segments. The improvement in overall sales volume was driven by higher sales of equipment to end users, partially offset by the impact of changes in dealer inventories and lower services sales volume.

Sales growth was noted across all segments. Region-wise, North America witnessed a 25% year-over-year improvement in sales. EAME reported 8% growth in sales while Latin America and the Asia Pacific saw declines of 11% and 1%, respectively.

Higher Sales Offset Cost Impact on Margins

In the quarter under review, the cost of sales increased 4% year over year to around $10.6 billion. Manufacturing costs were higher in the quarter, reflecting inflated material costs, unfavorable cost absorption, an increase in period manufacturing costs and the impact of manufacturing inefficiencies.  These were somewhat offset by lower freight costs.

Gross profit improved 30% year over year to $6.23 billion, mainly driven by higher sales. The gross margin was 37% in the quarter under review, up from 32% in the prior-year quarter.

Selling, general and administrative expenses increased 16% year over year to around $1.6 billion. Research and development expenses were up 16% to $554 million. This was mainly due to CAT’s investments aligned with strategic initiatives.

CAT reported an operating profit of $3.45 billion in the third quarter of 2023 compared with $2.43 billion in last year’s quarter. Gains from increased volumes and favorable price realization helped offset higher costs, leading to a 42% year-over-year jump in profits. The operating margin was 20.5% in the reported quarter, up from 16.2% in the prior-year quarter.

Adjusted operating profit was around $3.49 billion in the quarter, up 41% from $2.47 million in last year’s quarter. The adjusted operating margin was 20.8% in the third quarter of 2023 compared with 16.5% in the year-ago quarter.

Segment Performances

Machinery and Energy & Transportation (ME&T) sales rose 12% year over year to around $16 billion in the quarter under review.

Construction Industries' sales were up 12% year over year to $7 billion on favorable price realization. Sales were up 31% in North America and 8% in EAME. Sales meanwhile plunged 31% in Latin America and 8% in Asia Pacific.

The segment’s external sales were higher than our estimate of $6.26 billion, which had factored in a volume and pricing growth of 3.1% and 1.1%, respectively, for the quarter. The segment reported volume growth of 1% and a favorable price impact of 11%, which led to the variance.

Sales in the Resource Industries segment gained 9% year over year to around $3.35 billion as improved price realization offset lower volumes. Sales volume was impacted as higher sales of equipment to end users were more than offset by lower aftermarket parts sales volume and the impact of changes in dealer inventories. North America reported year-over-year growth of 22%, followed by Latin America registering 6% growth. Sales at EAME and Asia Pacific declined 3% and 1%, respectively.

The segment’s third-quarter sales were higher than our projection of $3.31 billion. We had expected volume and pricing to contribute 10.7% and 2.2%, respectively, to the revenue growth in the quarter. The segment reported a 3% decline in volume which was offset by an 11% favorable impact from pricing.

Sales of the Energy & Transportation segment in the quarter were around $6.86 billion, reflecting growth of 11% on higher sales volume and favorable price realization. The segment reported sales growth across all applications, which are Oil and Gas (26%), Power Generation (21%) Industrial (5%) and Transportation (6%).

For the Energy & Transportation segment, our sales estimate was $6 billion, with volume growth at 16% and pricing at 5%. The segment’s volume growth was 8% in the third quarter and pricing improved 6%.

The ME&T segment reported an operating profit of $3.39 billion, which reflected an improvement of 48% year over year. The Construction Industries segment witnessed a 53% surge in operating profit to $1.85 billion. The Resource Industries segment’s operating profit soared 44% year over year to $730 million in the third quarter. The Energy & Transportation segment’s operating profit increased 26% year over year to $1.18 billion. Favorable price realization helped offset the impact of higher costs, resulting in the improvement in respective segments’ profits.

Financial Products’ total revenues climbed 20% to $979 million from the prior-year quarter due to higher average financing rates in all regions. The segment's profits were $203 million in the reported quarter, which was 8% lower than the year-ago quarter. This was due to the absence of prior-year reserve releases for credit losses at Cat Financial, partially offset by a favorable impact from mark-to-market adjustments on derivative contracts.

Cash Position

During the first nine-month period of 2023, Caterpillar’s operating cash flow was $8.9 billion compared with $5.03 billion in the prior-year comparable period. Through the quarter, the company returned $1 billion to shareholders as dividends and share repurchases. CAT ended the reported quarter with cash and equivalents of around $6.5 billion.

Outlook for Q4 & 2023

Caterpillar expects a slight year-over-year improvement in its fourth-quarter total sales. Price and demand are expected to remain favorable. However, changes in dealer inventories will somewhat offset these gains.

For the Construction Industries segment, the company does not expect the seasonal sales to increase as seen historically from the third to the fourth quarter. The company anticipates lower shipment volumes in the fourth quarter as it completes the Cat engine changeover in building construction products, and dealers lower inventories, mainly of excavators.

For the Resource Industries segment, the company expects a slight dip in sales for the third quarter on both sequentially and year-over-year comparisons.

Fourth-quarter sales in Energy & Transportation are expected to be up sequentially aided by higher solar turbines and rail deliveries. Industrial sales are, however, expected to moderate during the fourth quarter from the recent elevated levels

Adjusted operating margin in the fourth quarter of 2023 is expected to be lower than the third quarter of 2023. Margin in the Construction Industries segment will be lower sequentially due to a decline in volumes. The Resource Industries segment’s margins will be lower sequentially bearing the impact of cost absorption, along with higher spending, relating to strategic investments.

In Energy & Transportation, margins will be similar to the third quarter of 2023 levels. Gains from higher volume will be offset by manufacturing costs and an unfavorable mix of products, which includes international locomotive deliveries in rail.

Despite the expected decline in margins in the fourth quarter, backed by the performance so far in the year, Caterpillar expects adjusted operating margin to be slightly above the targeted range in 2023. The company has provided a wide range of $42 billion to $72 billion for its sales expectations for 2023. At the lowest level of its sales guidance ($42 billion), the company had guided operating margin in the range of 10% to 13%. At the midpoint, ($57 billion) operating margin is expected to range between 14% and 17%. If sales are near the top-end of its guidance, ($72 billion), the operating margin is projected to be between 18% and 21%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

At this time, Caterpillar has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. 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.


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.

Performance of an Industry Player

Caterpillar is part of the Zacks Manufacturing - Construction and Mining industry. Over the past month, Terex (TEX - Free Report) , a stock from the same industry, has gained 5.8%. The company reported its results for the quarter ended September 2023 more than a month ago.

Terex reported revenues of $1.29 billion in the last reported quarter, representing a year-over-year change of +15.1%. EPS of $1.75 for the same period compares with $1.20 a year ago.

Terex is expected to post earnings of $1.40 per share for the current quarter, representing a year-over-year change of +4.5%. Over the last 30 days, the Zacks Consensus Estimate has changed -0.8%.

Terex has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of B.

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