Caterpillar Inc. (CAT Quick QuoteCAT - Free Report) has been benefiting from improving demand in its end markets and cost-control efforts, which are reflected in its eleven-quarter stint of year-over-year revenue and earnings growth. This is impressive considering the inflationary pressures and supply-chain snarls faced by the company as well as the industry at large through this period.

CAT’s solid backlog and upbeat outlook for its segments position it well for improved results in the forthcoming quarters as well. The company’s ongoing investments in its expanded offerings, services and digital initiatives are expected to contribute to growth.

Caterpillar currently carries a Zacks Rank #3 (Hold).

Shares of Caterpillar have gained 22.5% in the past year compared with the industry’s 14.9% growth. The Zacks Industrial Products sector has gained 10.7% and the S&P 500 composite has risen 22.6% in the same time frame.

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Solid Q3 Results & Robust Backlog Levels: Caterpillar reported adjusted earnings per share of $5.52 in the third quarter of 2023, which 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.

The backlog at the end of the quarter was a healthy $28.1 billion. This bodes well for CAT’s top-line performance in the quarters ahead.

Positive Earnings Surprise History: Caterpillar has an average earnings surprise of 16.6% in the trailing four quarters.

Upbeat Growth Projections: The Zacks Consensus Estimate for 2023 earnings is pegged at $20.58 per share, which suggests growth of 48.7% from the year-ago reported figure. The consensus mark for fiscal 2024 earnings is $20.71 per share, indicating a year-over-year improvement of 1%.

CAT has an estimated long-term earnings growth rate of 12%.

Solid Demand to Aid Top-Line Growth

In North America, demand in the residential and non-residential construction sectors is likely to bolster demand for Caterpillar’s construction equipment. The stepped-up investment in roads, bridges, airports and waterways, as a result of the U.S. Infrastructure Investment and Jobs Act, represents a huge opportunity for CAT. In the Asia-Pacific (barring China) region, higher commodity prices, housing strength and increased government spending on infrastructure will support construction equipment sales. Increased construction activity will drive machine demand in EAME and Latin America.

In Resource Industries, mining orders are on an uptrend, auguring well for the Resource Industries segment. Miners are increasingly relying on autonomous systems to enhance productivity and reduce costs and emissions. Therefore, Caterpillar is enhancing its autonomous capabilities and bringing innovative products to the market. In the Energy & Transportation segment, strong order rates in most applications are expected to support revenues.

Strong Balance Sheet

Caterpillar's cash and liquidity position remains strong, which enables it to invest in growth while returning cash to shareholders. The company generated an operating cash flow of $8.9 billion in the first nine months of 2023 and ended the period with cash and short-term investments of $6.5 billion. Machinery, Energy & Transportation debt was $8.5 billion. Its times interest earned ratio has improved substantially over the years and is currently 9.3.

Caterpillar’s board of directors had earlier approved an 8% hike in the quarterly dividend this year. The company paid higher dividends to shareholders for 30 straight years and is a member of the S&P 500 Dividend Aristocrat Index.

CAT's 1.82% dividend yield is higher than the sector’s yield of 1.51% and the S&P500’s 1.39%. The company has a five-year dividend growth rate of 7.5% and a payout ratio of 25.2%, higher than its industry peers. Over the past four years, the company has returned an average of 99% of its ME&T free cash flow to shareholders, which is in sync with its target to return its full ME&T free cash flow to shareholders over time. The company expects free cash flow in 2023 to be higher than its stated ME&T free cash flow range of $4 to $8 billion, backed by healthy customer demand and strong operating performance.

Growth Strategies in Place

Caterpillar continues to focus on customers and the future by steadily investing in digital capabilities, connecting assets and job sites, and developing next-generation productive and efficient products. CAT is consistently investing in expanding its offerings and services, as well as digital initiatives like e-commerce, to drive long-term growth.

Stocks to Consider

Some better-ranked stocks from the Industrial Products sector are Crane Company (CR Quick QuoteCR - Free Report) , Applied Industrial Technologies (AIT Quick QuoteAIT - Free Report) and A. O. Smith Corporation (AOS Quick QuoteAOS - Free Report) . CR currently sports a Zacks Rank #1 (Strong Buy), and AIT and AOS each carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Crane Company’s 2023 earnings per share is pegged at $4.18. The consensus estimate for 2023 earnings has been unchanged in the past 60 days. The company has a trailing four-quarter average earnings surprise of 29.8%. CR shares have rallied 38% in a year.

Applied Industrial has an average trailing four-quarter earnings surprise of 15%. The Zacks Consensus Estimate for AIT’s 2023 earnings is pinned at $9.43 per share, which indicates year-over-year growth of 7.8%. Estimates have moved up 4% in the past 60 days. The company’s shares have gained 40% in a year.

The Zacks Consensus Estimate for A. O. Smith’s 2023 earnings is pegged at $3.77 per share. The consensus estimate for 2023 earnings has moved 5% north in the past 60 days and suggests year-over-year growth of 20.1%. The company has a trailing four-quarter average earnings surprise of 14%. AOS shares have gained 42% in a year.