Caterpillar, a Dow component and gauge for global economic health reported mixed second-quarter numbers on Tuesday before the market open. $CAT beat on earnings but missed on revenue. Price realization was the highest in more than two years despite recessionary impact for the cyclical construction and mining businesses. The stock had significantly outperformed the market in 2022 after the market sold off the stock with concerns about the supply chain and inflation heading into 2022. However, $CAT fell to $183.51 −$11.35 (- 5.82%) with concerns about slowing sales from Cat dealers.
The industrial equipment manufacturer is right at the front line for global supplies.
Caterpillar Inc. (NYSE: $CAT) Report Earnings Before Open Tuesday
$3.18 Beat $3.03 EPS Forecast AND $14.25Bln Missed $14.37 billion forecast in revenue
Caterpillar reported $3.18 in adjusted per-share earnings from $14.2 billion in sales. Wall Street was expecting $3.03 in adjusted per-share earnings from $14.37 billion in sales. In the first quarter, Caterpillar reported a profit of $2.87 a share from sales of $12.9 billion.
“Our team delivered another good quarter with double-digit top line and adjusted profit per share growth despite ongoing supply chain challenges,” said CEO Jim Umpleby in the company’s news release. “Our second-quarter results reflect healthy demand across most of our end markets.”
Caterpillar Q2 22 Earnings:
- Adj EPS: $3.18 (est $3.03)
- Revenue: $14.25Bln (est $14.37Bln)
- Total sales include $708 million in revenue from Caterpillar’s financial unit. Wall Street was looking for $733 million.
- Backlog at its highest level since the first quarter of 2012.
- But machine dealer sales declined 4% in the quarter
- Operating profit margin 13.6% in the quarter, down slightly from 13.9% in the same three months last year.
- Enterprise free cash flow of $2.5 billion for the first half of 2022
- $1.1 billion of stock repurchases
- $600 million worth of dividend payments in the second quarter.
Caterpillar expects sales to increase in the current quarter, and for-profit margins to improve as pricing power offsets manufacturing cost increases. Demand from North America remains strong, helping to counter weakness in Europe and falling demand in Asia.
“We’re still dealing with an inflationary environment, and we have not seen a decrease from our suppliers as a result of commodities price reductions,” CEO Umpleby said on the earnings call.
Umpleby saying it’s still too early for him to predict what’s going to happen in a China, which accounts for 5% to 10% of Caterpillar’s total business sales. The market weakened in China after strong years in 2020 and particularly in 2021, the CEO said.
On supply chain issues, “It’s still hand-to-hand combat,” Umpleby said. “Our teams are working their way through those issues.”
Caterpillar Earnings Risks
Caterpillar’s sales were hurt by its exit from Russia as well as supply chain issues, and it also saw elevated costs during the quarter.
- Higher freight costs, rising material costs, and production inefficiencies related to supply chain constraint headwinds caused operating margin to contract
- Higher manufacturing costs were the biggest factor hurting margins, offsetting some of the pricing and volume gains.
- Rising oil and gas prices are buoying CAT’s Energy & Transportation segment as oil and gas production and exploration companies ramped up activity to capitalize on higher commodity prices.
Caterpillar was ravaged by the pandemic and the global economic downturn that ensued Caterpillar emerged from those troubles in a favorable position as construction activities and infrastructure spending rebounded. Light dealer inventories, coupled with strengthening demand for machinery, set the stage for a sharp upswing in equipment sales. However, the supply crisis brings darkening clouds with the risk of nullifying CAT’s vastly improved performance and upside results.
Margins continue to be squeezed by a combination of higher freight costs, rising material costs, and production inefficiencies related to supply chain constraints. China remains a difficult sluggish market with escalating risks and volatility from the property market collapse there. This is a threat to CAT’s construction business. On top of this rising interest rates forewarned by the Fed and tighter monetary policies could slow capital investments into large-scale projects, dampening demand for heavy machinery.
The company contending with higher manufacturing costs and ongoing supply chain disruptions and shipping congestion is applying further pressure on expenses.
The chip shortage that has derailed production at major automakers like General Motors (GM) and Ford (F) may trickle down to CAT. Throwing a wrench in the bullish outlook is the possibility that the disruptive chip shortages will filter through to CAT, preventing it from fully reaping the rewards of a favorable environment.
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