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Caterpillar (CAT) Moves Above 50-Day SMA Post Q2 Earnings: Time to Buy?
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Caterpillar Inc. (CAT - Free Report) reported second-quarter 2024 results on Aug 6. Although revenues declined 4%, the company achieved year-over-year margin improvement and recorded its highest-ever quarterly earnings. Earnings surpassed expectations, but revenues fell short. Despite mixed results, Caterpillar’s moved up 6% since the report as the market had anticipated it to report declines in the top and the bottom line.
The mining and construction equipment giant lowered its sales outlook for 2024 but provided upbeat expectations for operating margin and earnings per share, which also positively influenced its performance.
The stock broke through its 50-day simple moving average (SMA) on Aug 7, indicating a potential short-term bullish trend.
CAT Breaks Out Above the 50-Day Moving Average
Image Source: Zacks Investment Research
CAT’s shares have gained 13.7% year to date compared with the industry’s 11.4% growth. It has also outpaced the broader Zacks Industrial Products sector’s 3.2% increase and the S&P 500’s rise of 11.7%.
CAT’s YTD Price Performance
Image Source: Zacks Investment Research
Is this the right time to buy CAT shares to gain from the potential upside? Let us delve deeper into the second-quarter results and evaluate the stock’s fundamentals to find out.
Q2 Expectations: The Zacks Consensus Estimate for CAT’s revenues was pegged at $16.76 billion, indicating a 3.2% year-over-year decline. The consensus for CAT’s bottom line was at $5.53 per share, suggesting a 0.4% dip from the year-ago quarter’s levels.
Q2 Results: The company’s revenues declined 4% year over year to $16.69 billion. Adjusted earnings per share improved 8% year over year to a record $5.99.
Higher Pricing, Favorable Manufacturing Costs Aid Margins: Caterpillar witnessed a $1.2 billion decline in volumes due to changes in dealer inventories. However, its impact on revenues was partially mitigated by a favorable price realization of $0.58 billion. Despite lower revenue growth, the company delivered a year-over-year expansion of 310 basis points in gross margin. The upside can be attributed to favorable manufacturing costs (mainly lower freight costs).
Despite higher selling, general and administrative and Research and development expenses as a result of CAT’s ongoing strategic investments, the adjusted operating margin in the quarter improved to 22.4% from 21.3% in the year-ago quarter. Its pricing actions and incessant focus on cost control have aided margins.
Energy & Transportation Segment Continues to Buoy Results: The Energy & Transportation segment witnessed sales growth of 2% that offset the 7% decline in sales in Construction Industries and a 10% drop in Resource industries. Volumes were reported to be down across all of the segments owing to changes in dealer inventories.
Only the Energy & Transportation segment reported a 20% year-over-year increase in operating profit in the quarter. The Construction Industries segment’s operating profit dropped 3% year over year and the Resource Industries segment’s operating profit was down 3%.
On a bright note, all of the segments witnessed improvement in operating margins aided by favorable price realization and manufacturing costs.
Solid Cash Position: Caterpillar’s operating cash flow for the first half of 2024 was around $5.1 billion compared with $4.8 billion in the year-ago comparable period. Through the first half, 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.
Robust Backlog Levels: The company ended the second quarter with a backlog of $28.6 billion, which was higher by $700 million sequentially. Backlog, as a percentage of revenues, is higher than historic levels and will support revenues in the forthcoming quarters.
Guidance Revised: Caterpillar expects revenues in 2024 to be slightly lower than the record 2023 revenues of $67 billion. The company had earlier stated that 2024 revenues would be “broadly similar” to 2023 levels.
Adjusted operating margin is now expected to be above the company’s target range, corresponding to the expected level of revenues. Caterpillar previously expected adjusted operating profit margin to be in the top half of the range.
The company maintains its guidance of revenues at $42-$72 billion. According to the revenue levels, margins are expected between 10% and 22%. This is shown in the chart below.
CAT's Guidance Range
Image Source: Caterpillar
Few Near Term Concerns Prevail
Low Volumes Trends: The company has been witnessing a decline in overall volumes in the past three consecutive quarters. This mainly reflects muted consumer spending in the current inflationary scenario. The Resource Industries segment has seen its volume decline in the last four quarters and Construction Industries’ volume growth has been in the red in the past three quarters. The Energy & Transportation segment’s volumes have been down only in the second quarter.
Weak Demand in China: Due to a slowdown in China's real estate industry, the construction industry has taken a hit in the country. Caterpillar is expected to continue to see weak demand for the 10-ton and above excavator market in China, which had been one of its largest markets previously.
Valuation
CAT is currently trading at a forward 12-month P/E of 15.1, at a premium compared with the industry’s 13.78X. The stock is also not cheap when compared with Komatsu (KMTUY - Free Report) , Terex Corporation (TEX - Free Report) and The Manitowoc Company (MTW - Free Report) , all of which are currently trading below the industry.
Image Source: Zacks Investment Research
Promising Long-Term Prospects
The increase in projects enabled by the U.S. Infrastructure Investment and Jobs Act creates massive opportunities for Caterpillar’s wide range of construction equipment. The worldwide efforts in the transition to clean energy will require a vast amount of commodities, which, in turn, will boost the demand for Caterpillar’s mining equipment. Miners are increasingly relying on autonomy to increase productivity and efficiency, reduce costs and improve safety. CAT has been enhancing its autonomous fleet to capitalize on these trends.
In Energy & Transportation, strong order rates in most applications are expected to support revenues. In the Oil & Gas sector, the increased focus on sustainability will drive the demand for CAT equipment. As technology companies establish data centers globally to support their generative AI applications, the company is witnessing robust order levels for reciprocating engines for data centers. It is planning to double its output with a multi-year capital investment.
CAT has been seeing growth in aftermarket parts and service-related revenues, which generate high margins. It is on track to double its services revenues from $14 billion in 2016 to $28 billion in 2026.
Attractive Dividend Yield & Payout
In June 2024, Caterpillar announced an 8% hike in the quarterly dividend to $1.41 per share. The company has a five-year dividend growth rate of 6.1%. CAT's 1.68% dividend yield is higher than the sector’s yield of 1.50% and the S&P 500’s 1.31%. CAT has a payout ratio of 23.3%, higher than the industry’s 22.5%. The company has a solid track of paying higher dividends to shareholders for 30 straight years.
CAT recently added $20 billion to its existing share repurchase authorization, which was launched in 2022 with no expiration date. This entitles Caterpillar to repurchase up to $21.6 billion of its common stock.
Upbeat Earnings Growth Projections
Earnings estimates for Caterpillar have moved down for both 2024 and 2025. Notwithstanding the downward activity, the estimate for 2024 indicates a year-over-year growth of 2.3% and the same for 2025 suggests a 5.1% growth. CAT has a long-term EPS growth rate of 9%.
Image Source: Zacks Investment Research
To Sum Up
The record earnings achieved in the second quarter, despite weaker revenues, underscore the effectiveness of the company's pricing strategies and cost-saving measures. Caterpillar’s solid long-term demand prospects, backed by infrastructure spending and energy-transition trends, as well as its focus on growing service revenues, should help it maintain an upbeat performance. A strong financial position enables it to invest in its businesses and return cash to shareholders through share buybacks and consistent dividend payments. However, persistent weakness in volumes, particularly in the 10-ton and above excavator market in China, is a concern.
Existing stakeholders should maintain their position in this Zacks Rank #3 (Hold) stock, while new investors should wait for a better entry point, given its higher valuation.
Image: Bigstock
Caterpillar (CAT) Moves Above 50-Day SMA Post Q2 Earnings: Time to Buy?
Caterpillar Inc. (CAT - Free Report) reported second-quarter 2024 results on Aug 6. Although revenues declined 4%, the company achieved year-over-year margin improvement and recorded its highest-ever quarterly earnings. Earnings surpassed expectations, but revenues fell short. Despite mixed results, Caterpillar’s moved up 6% since the report as the market had anticipated it to report declines in the top and the bottom line.
The mining and construction equipment giant lowered its sales outlook for 2024 but provided upbeat expectations for operating margin and earnings per share, which also positively influenced its performance.
The stock broke through its 50-day simple moving average (SMA) on Aug 7, indicating a potential short-term bullish trend.
CAT Breaks Out Above the 50-Day Moving Average
CAT’s shares have gained 13.7% year to date compared with the industry’s 11.4% growth. It has also outpaced the broader Zacks Industrial Products sector’s 3.2% increase and the S&P 500’s rise of 11.7%.
CAT’s YTD Price Performance
Is this the right time to buy CAT shares to gain from the potential upside? Let us delve deeper into the second-quarter results and evaluate the stock’s fundamentals to find out.
Q2 Expectations: The Zacks Consensus Estimate for CAT’s revenues was pegged at $16.76 billion, indicating a 3.2% year-over-year decline. The consensus for CAT’s bottom line was at $5.53 per share, suggesting a 0.4% dip from the year-ago quarter’s levels.
Q2 Results: The company’s revenues declined 4% year over year to $16.69 billion. Adjusted earnings per share improved 8% year over year to a record $5.99.
Higher Pricing, Favorable Manufacturing Costs Aid Margins: Caterpillar witnessed a $1.2 billion decline in volumes due to changes in dealer inventories. However, its impact on revenues was partially mitigated by a favorable price realization of $0.58 billion. Despite lower revenue growth, the company delivered a year-over-year expansion of 310 basis points in gross margin. The upside can be attributed to favorable manufacturing costs (mainly lower freight costs).
Despite higher selling, general and administrative and Research and development expenses as a result of CAT’s ongoing strategic investments, the adjusted operating margin in the quarter improved to 22.4% from 21.3% in the year-ago quarter. Its pricing actions and incessant focus on cost control have aided margins.
Energy & Transportation Segment Continues to Buoy Results: The Energy & Transportation segment witnessed sales growth of 2% that offset the 7% decline in sales in Construction Industries and a 10% drop in Resource industries. Volumes were reported to be down across all of the segments owing to changes in dealer inventories.
Only the Energy & Transportation segment reported a 20% year-over-year increase in operating profit in the quarter. The Construction Industries segment’s operating profit dropped 3% year over year and the Resource Industries segment’s operating profit was down 3%.
On a bright note, all of the segments witnessed improvement in operating margins aided by favorable price realization and manufacturing costs.
Solid Cash Position: Caterpillar’s operating cash flow for the first half of 2024 was around $5.1 billion compared with $4.8 billion in the year-ago comparable period. Through the first half, 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.
Robust Backlog Levels: The company ended the second quarter with a backlog of $28.6 billion, which was higher by $700 million sequentially. Backlog, as a percentage of revenues, is higher than historic levels and will support revenues in the forthcoming quarters.
Guidance Revised: Caterpillar expects revenues in 2024 to be slightly lower than the record 2023 revenues of $67 billion. The company had earlier stated that 2024 revenues would be “broadly similar” to 2023 levels.
Adjusted operating margin is now expected to be above the company’s target range, corresponding to the expected level of revenues. Caterpillar previously expected adjusted operating profit margin to be in the top half of the range.
The company maintains its guidance of revenues at $42-$72 billion. According to the revenue levels, margins are expected between 10% and 22%. This is shown in the chart below.
CAT's Guidance Range
Few Near Term Concerns Prevail
Low Volumes Trends: The company has been witnessing a decline in overall volumes in the past three consecutive quarters. This mainly reflects muted consumer spending in the current inflationary scenario. The Resource Industries segment has seen its volume decline in the last four quarters and Construction Industries’ volume growth has been in the red in the past three quarters. The Energy & Transportation segment’s volumes have been down only in the second quarter.
Weak Demand in China: Due to a slowdown in China's real estate industry, the construction industry has taken a hit in the country. Caterpillar is expected to continue to see weak demand for the 10-ton and above excavator market in China, which had been one of its largest markets previously.
Valuation
CAT is currently trading at a forward 12-month P/E of 15.1, at a premium compared with the industry’s 13.78X. The stock is also not cheap when compared with Komatsu (KMTUY - Free Report) , Terex Corporation (TEX - Free Report) and The Manitowoc Company (MTW - Free Report) , all of which are currently trading below the industry.
Promising Long-Term Prospects
The increase in projects enabled by the U.S. Infrastructure Investment and Jobs Act creates massive opportunities for Caterpillar’s wide range of construction equipment. The worldwide efforts in the transition to clean energy will require a vast amount of commodities, which, in turn, will boost the demand for Caterpillar’s mining equipment. Miners are increasingly relying on autonomy to increase productivity and efficiency, reduce costs and improve safety. CAT has been enhancing its autonomous fleet to capitalize on these trends.
In Energy & Transportation, strong order rates in most applications are expected to support revenues. In the Oil & Gas sector, the increased focus on sustainability will drive the demand for CAT equipment. As technology companies establish data centers globally to support their generative AI applications, the company is witnessing robust order levels for reciprocating engines for data centers. It is planning to double its output with a multi-year capital investment.
CAT has been seeing growth in aftermarket parts and service-related revenues, which generate high margins. It is on track to double its services revenues from $14 billion in 2016 to $28 billion in 2026.
Attractive Dividend Yield & Payout
In June 2024, Caterpillar announced an 8% hike in the quarterly dividend to $1.41 per share. The company has a five-year dividend growth rate of 6.1%. CAT's 1.68% dividend yield is higher than the sector’s yield of 1.50% and the S&P 500’s 1.31%. CAT has a payout ratio of 23.3%, higher than the industry’s 22.5%. The company has a solid track of paying higher dividends to shareholders for 30 straight years.
CAT recently added $20 billion to its existing share repurchase authorization, which was launched in 2022 with no expiration date. This entitles Caterpillar to repurchase up to $21.6 billion of its common stock.
Upbeat Earnings Growth Projections
Earnings estimates for Caterpillar have moved down for both 2024 and 2025. Notwithstanding the downward activity, the estimate for 2024 indicates a year-over-year growth of 2.3% and the same for 2025 suggests a 5.1% growth. CAT has a long-term EPS growth rate of 9%.
To Sum Up
The record earnings achieved in the second quarter, despite weaker revenues, underscore the effectiveness of the company's pricing strategies and cost-saving measures. Caterpillar’s solid long-term demand prospects, backed by infrastructure spending and energy-transition trends, as well as its focus on growing service revenues, should help it maintain an upbeat performance. A strong financial position enables it to invest in its businesses and return cash to shareholders through share buybacks and consistent dividend payments. However, persistent weakness in volumes, particularly in the 10-ton and above excavator market in China, is a concern.
Existing stakeholders should maintain their position in this Zacks Rank #3 (Hold) stock, while new investors should wait for a better entry point, given its higher valuation.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.