Irving, Texas-based Caterpillar, a Dow component and gauge for global economic health reported first quarter numbers that topped Wall Street expectations with a 31% rise in first quarter profit on Thursday before the market open. $CAT reported a record $4.91adjusted earnings per share, beating Refinitiv analysts’ consensus of $3.78 per share. The company saw strong demand for its construction and mining equipment and engines for transportation and energy generation despite higher prices. The US administration’s infrastructure legislation encouraged spending in the construction sector, pumping demand for excavators, bulldozers and trucks.
The industrial equipment manufacturer is right at the front line for global supplies.
Caterpillar Inc. (NYSE: $CAT) Report Earnings Before Open Thursday
Q1 2023 Earnings
- Net income rose to $1.94 billion, or $3.74 a share, from $1.54 billion, or $2.86 a share, in the same period a year ago.
- Adjusted earnings per share reached a record $4.91, well above the average analyst estimate as compiled by FactSet of $3.80. The result beat expectations by the widest margin in two years, according to FactSet data.
- Revenue grew 16.7% to $15.86 billion, beating the FactSet consensus of $15.10 billion, also the biggest beat in two years
- Price realization represented 13.9% of the revenue growth, compared with 6.3% a year ago.
- Sales volume contributed 4.2% of the growth, but that was down from 10.1% last year.
- Energy and transportation sales jumped 24%,
- Resource industries sales increased 21% a
- Construction industries revenue rose 10%.
- Operating profit margins improved to 17.2% from 13.7%
- Operating costs increased by 11.9%, much less than sales.
- Excluding restructuring costs, adjusted operating profit margins increased to 21.1% and were “significantly better than we anticipated,” CEO Umpleby said, “due to better than expected manufacturing costs, including efficiencies and absorption, stronger price realization and volume growth.”
CAT Stock Market Reaction
- $214.37 ▼ -1.82 (-0.84%) Close
- $214.37 ▲ +0.41 (+0.19%) past year
- $214.37 ▲ +68 (+46.46%) past 5 years
- 52wk High 266.04
- 52wk Low 160.60
The company didn’t provide formal earnings or revenue guidance, a practice it started in 2020 due to uncertainties resulting from the COVID-19 pandemic. CAT said, however, that it expects full-year 2023 adjusted operating margins to be at the top half of the targeted range of 18% to 21%, second-quarter sales to increase versus the first quarter in line with normal seasonality and second quarter adjusted operating profit margin to be lower than the first quarter but in line with normal seasonality.
Caterpillar is optimistic about the year ahead. On the post-earnings conference call with analysts, Chief Executive Officer Jim Umpleby said he didn’t expect the trend of dealer inventory rebuilds seen in the second half of 2022 to repeat this year.
“Instead, we expect to see dealers decrease inventories compared to first quarter levels and end 2023 about flat relative to the end of 2022,” Umpleby said.
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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