Caterpillar Earnings Beat but Global Supply Chain and inflation Uncertainty Remains

Caterpillar, a Dow component and gauge for global economic health reported better-than-expected fourth-quarter numbers on Friday. However, the market sold off the stock with concerns about the supply chain and inflation heading into 2022. $CAT shares fell to $201.16, down $11.01 or 5.19%. The industrial equipment manufacturer is right at the front line for global supplies.

Caterpillar Convoy

Caterpillar Inc. (NYSE: $CAT) Reported Earnings Before Open Friday

$2.69 Beat $2. 27 EPS Forecast AND $13.8 Billion Missed $12.6 billion forecast in revenue 

Earnings

Caterpillar Inc. (NYSE: CAT), a Dow component and gauge for global economic health reported better-than-expected fourth-quarter numbers on Friday. However, the market sold off the stock with concerns about the supply-chain and inflation heading into 2022. Caterpillar shares fell to $201.16, down $11.01 or 5.19%.

Caterpillar reported Q4 adjusted EPS $2.69 from $13.8 billion in sales. Wall Street was expecting earnings of $2.27 a share from $12.6 billion in sales. A year ago, Caterpillar reported $2.12 in per-share earnings from $11.2 billion in sales. The industrial giant delivered its seventh consecutive earnings “beat”. As is the pattern the stock, fell on the news as it has following five of the past six earnings beats. The outlier was last report, shares rose 4.1% following a better-than-expected third-quarter 2021 earnings report.

Earnings Highlights

  • Operating profit grew about $200 million, or 17%, year over year, driven by higher volume and pricing.
  • Operating profit margins at about 11.6%, down from 12.5% reported in the fourth quarter of 2020. Higher freight costs, rising material costs, and production inefficiencies related to supply chain constraint headwinds caused operating margin to contract by 600 bps yr/yr to 11.7%.
  • Higher manufacturing costs were the biggest factor hurting margins, offsetting some of the pricing and volume gains.
  • Sales of construction equipment $5.7 billion, up 27% from the fourth quarter of 2020. Ongoing strength in the North American residential construction market is the key catalyst for this business
  • Resource sector, which includes mining, sales grew 27%, bolstered by rising commodity and raw material prices, following up sales growth of 32% in Q3. These rising prices are a double-edged sword for CAT, though, because building its machinery is becoming more expensive.
  • Energy & Transportation revenue rose 19% to $5.7 bln. 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.
  • Data center growth through cloud computing plays has been boosting CAT sales also as the company manufactures and sells generators that power data centers. The company singled out robust data center demand as a key catalyst for its Energy & Transportation business.
  • Caterpillar’s lending unit reported $701 million in sales, up about 5%. Operating profit in that division expanded to $248 million, up from $195 million, partly due to lower provisions for credit losses.

“I’m proud of our global team’s continued resilience in what proved to be a challenging and dynamic operating environment,” said CEO Jim Umpleby in the company’s news release. “Amid ongoing supply-chain constraints, our team continues to execute our strategy for long-term profitable growth while striving to meet customer demand.”

Outlook

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.

CAT expects the booming demand environment to continue forecasting 1Q22 sales that exceed year-ago levels. However margins continue to be squeezed by a combination of higher freight costs, rising material costs, and production inefficiencies related to supply chain constraints. CAT expects those cost pressures to persist into 1Q11, causing adjusted operating profit margin to decline on a sequential basis.

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.

Moving forward it is how quickly Caterpillar can adjust to these changes and how quickly the tougher environment improves. Whilst the company believes that supply chain issues will ease after 1Q22, it remains to be seen at this point.

The company contending with higher manufacturing costs and ongoing supply chain disruptions and shipping congestion is applying further pressure on expenses. With COVID cases rising in various countries, the risk of these disruptions extending into 2021 is increasing. Furthermore, the prospects for slower global economic growth due to rising cases creates additional uncertainty.

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. 

Source: CAT, AlphaStreet

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