Club holding Caterpillar (CAT) delivered another strong quarter before the opening bell Tuesday, sparking a much-deserved rally of more than 8% to an all-time high above $287 per share. Revenue in the second quarter increased 22% year over year to $17.32 billion, exceeding estimates of $16.49 billion, according to Refinitiv. Adjusted earnings per share (EPS) surged 75% to $5.55, well ahead of estimates of $4.58. Profit margin performance was well ahead of expectations, with operating income beating across all of the company’s product segments. CAT 5Y mountain Caterpillar 5-year performance Bottom line Strong headline results at Caterpillar were met with a very bullish conference call — giving shares another jolt to the upside, thanks to positive commentary on the operating environment and growth drivers for the remainder of the year. In addition to strong quarterly sales, Caterpillar’s backlog increased to $30.7 billion. That represents a $300 million quarter-over-quarter gain and a $2.2 billion year-over-year surge. Despite strong results in the first quarter, shares sold off on concerns that the backlog, which was flat versus the fourth quarter, indicating that the strongest demand was in the rearview mirror. At the time, we never bought into that notion because there was too much infrastructure spending coming down the pipe. In Tuesday’s results, we’re starting to see that money flow through to the backlog. Indeed, management told us as much on the call that they “expect continued growth in nonresidential construction in North America due to the positive impact of government-related infrastructure investments and a healthy pipeline of construction projects.” How fast those orders come in will depend on the timeline to obtain permits, but the team does expect the order momentum to “last for some time.” Combined with commentary around dealer inventories and end market dynamics, this infrastructure potential gives us confidence in sustained demand through the end of the year and into 2024. While forward guidance wasn’t expressly given, management made clear that business has improved over the past three months, with full-year results tracking above where consensus estimates had been coming into the print. This was as good of a quarter as we could have hoped for, with plenty of conviction from management for continued momentum. That said, we told investors during Tuesday’s Morning Meeting that conviction always takes a back seat to discipline. With that view in mind, if not restricted, we would be trimming 25 shares, or a little over 7% of our position, due to the strong stock move higher. In line with that view, we’re maintaining our 2 rating , however, raising our price target to $300 per share, up from $285. Companywide Q2 results All three of Caterpillar’s physical product segments, as indicated in the table above, reported strong year-over-year revenue growth that beat estimates. While Financial Products sales missed the mark, lower credit loss provisions — an estimate on loans that won’t get repaid — helped segment operating income outpace expectations. Construction Industries sales in Q2 rose 19% to $7.15 billion. North America was up thanks to an increase in both selling prices and sales volume. On the call, management called out strong demand in both North American residential and nonresidential construction. Latin America saw a decline in sales volume, however, this was partially offset by an increase in prices. In Europe, Africa, and the Middle East, an increase in prices was compounded by higher sales volumes. Sales in Asia/Pacific were largely flat versus the year-ago period. China remains weak and that’s not expected to change much in the near term. Fortunately, China represents less than 5% of sales with weakness being more than offset by strong demand elsewhere in the Asia/Pacific region. Resource Industries sales of $3.56 billion increased by 20%. Segment sales benefited from both higher prices and an increase in sales volume, two factors that also aided segment operating income performance despite an increase in material costs. Within the segment, management expects “healthy mining demand to continue as commodity prices remain above investment thresholds.” Energy & Transportation sales increased 27% to $7.22 billion. Backlog commentary Management explained on the call that backlog levels are a function of demand (which adds to the backlog), as well as the company’s production rates and ability to ship out inventory (which decreases the backlog). With the supply chain improving and Caterpillar’s ability to more quickly turnover orders, we may see that robust backlog as of the end of Q2 decline in future quarters. If that were to occur, a declining backlog would not necessaliry be viewed negatively should it prove to be a function of shorter lead times thanks to increased product availability. Dealer inventories, another forward-looking metric to monitor, increased by about $600 million on a sequential basis and provided a $1 billion benefit to total sales. Caterpillar dealers are independent businesses and they’re not going to increase inventory levels if they aren’t seeing strong demand on the near-term horizon. Guidance As mentioned earlier in the bottom line , Caterpillar didn’t provide exact guidance numbers for every line item. But, we did get positive qualitative comments on the path ahead. The team stated plainly that they now expect their full-year 2023 to be better than they thought just three months ago. Starting with the third quarter, management noted that sales are expected to be higher on an annual basis but lower on a sequential basis (which is typical given seasonal trends). The Street was modeling a 6.8% annual increase and a 7.9% sequential decrease versus the topline results we got Tuesday (or a 2.9% sequential decline versus estimates coming into the print). How exactly that matches up versus estimates is hard to say but we would bet that it’s at least as good as analysts were looking for, probably a bit better. The adjusted operating profit margin for the third quarter is expected to have a similar dynamic, expansion versus the year-ago period and contraction on a sequential basis. That commentary is also in line with Street models coming into the print. On a full-year basis, management expects Caterpillar’s operating profit margin to “be close to the top end of our target range.” The team also noted that second-half sales will be higher versus the second half of 2022. Coming into the release, the Street had been modeling second-half sales of about $33.4 billion. In the first two quarters, Caterpillar generated sales of about $33.2 billion. Add those up and we get a blended full-year sales estimate of $66.4 billion. According to the target ranges provided by the company, we should be looking for an adjusted operating profit margin of about 19%, which if achieved would be ahead of the 18% margin the Street is currently expecting. However, that would be below the 21% in Q2. As for full-year cash flow, the team expects Machinery, Energy & Transportation (ME & T) to be “around the top” of their $4 billion to $8 billion range. That’s highly positive given that management intends to “return substantially all” ME & T free cash flow to shareholders via dividends and repurchases over time. (Jim Cramer’s Charitable Trust is long CAT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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A Caterpillar (Cat) Excavator is seen working at a construction site near the New York Harbor in Brooklyn, New York, March 4, 2021.
Brendan McDermid | Reuters
Club holding Caterpillar (CAT) delivered another strong quarter before the opening bell Tuesday, sparking a much-deserved rally of more than 8% to an all-time high above $287 per share.