Irving, Texas-based Caterpillar, a Dow component and gauge for global economic health reported second quarter numbers that topped Wall Street expectations with a 75% rise in quarterly profit to $2.92 billion, or $5.67 a share, from $1.67 billion on Wednesday before the market open. Adjusted earnings of $5.55 a share beat the consensus estimate of $4.58 a share. Sales rose 22% to $17.32 billion, well over the consensus estimate $16.53 billion, for the quarter. Caterpillar saw a wide margin leap primarily fueled by better-than-expected volume growth and lower-than-expected manufacturing costs, including freight.
The company saw strong demand for its construction and mining equipment and engines for transportation and energy generation despite higher prices. CAT traded toa record high 288.78, closing just off it at $288.65 ▲ +23.48 (+8.85%) at the close.
The industrial equipment manufacturer is right at the front line for global supplies.
Caterpillar Inc. (NYSE: $CAT) Report Earnings Before Open Thursday
“Our results reflect continued healthy demand as we achieved double-digit top-line growth and record adjusted profit per share while generating strong ME&T [machinery, energy & transportation] free cash flow,” Jim Umpleby, chairman and CEO of Caterpillar (CAT), said in prepared remarks.
Q2 2023 Earnings
- Net income rose 75% to $2.92 billion, or $5.67 a share, from $1.67 billion, or $3.13 a share, a year earlier.
- Adjusted earnings of $5.55 a share beat the consensus estimate of $4.58 a share.
- Revenue rose 22% to $17.32 billion versus consensus estimate $16.53 billion
- Adjusted operating margins ballooned to 21.3%, a 750 bp improvement yr/yr.
- Energy and transportation (E&T) sales increased 27% to $5.7 billion on greater demand for engines and turbines.
- Construction Industries (CI) sales rose +19% yr/yr
- Resource Industries (RI) sales rose +20% yr/yr
- North American segment all experienced over 30% growth.
- Latin America and Asia Pacific lagged, particularly in CI, where sales fell 11% in LatAm and were flat in Asia Pacific.
- Europe had lower sales to users due to weaker-than-expected market conditions,
- Middle East continued to exhibit robust construction activity.
- CAT again has managed to pass on the costs with higher prices.
CAT Stock Market Reaction
- $288.65 ▲ +23.48 (+8.85%) Close
- $288.65 ▲ +105.14 (+57.29%) past year
- $288.65 ▲ +152.73 (+112.37%) past 5 years
- 52wk High 288.78
- 52wk Low 160.60
CAT estimated sales and operating profit margin for the current quarter will be greater than they were a year earlier, but less than in Q2. CAT does not anticipate these favorable margin trends slowing over the near term, projecting adjusted operating margins closer to the top of its target range, which varies depending on where FY23 sales land. Management expects 2H23 revs to be higher than the $33.16 bln 1H23 revs, margins expected around 20-21% this year.
Looking ahead, CAT sees upbeat momentum in North America to continue through the rest of the year, especially in nonresidential construction, which is receiving a boost from government-related infrastructure investments.
Outside of China, which CAT noted will endure further weakness, CI in the Asia Pacific should see growth in subsequent quarters. Similar dynamics from Q2 in Europe, the Middle East, and Latin America will carry over through the remainder of 2023.
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.
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