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March 3, 2024

Caterpillar Smashes Earnings Expectations Driven by Strong Demand and Higher Prices

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Feb 5, 2024

Caterpillar, the world’s largest construction equipment manufacturer, reported better than expected fourth quarter earnings results on Monday, driven by strong demand across most end markets and its ability to offset inflationary pressures with higher prices. The company posted record revenues for both the fourth quarter and full year 2023. Shares jumped over 5% to an all-time high following the earnings beat.

Strong Demand Drives Record Revenues

Caterpillar reported fourth quarter revenues of $17.1 billion, up 18% compared to $14.5 billion in the prior year period and representing a quarterly record for the company. [1] This performance beat Wall Street estimates of $16.3 billion and marks Caterpillar’s best revenue growth in nine years.

For the full year 2023, revenues climbed 16% to $59.4 billion compared to 2022. This is Caterpillar’s highest annual revenue on record. [2]

Caterpillar Chairman and CEO Jim Umpleby attributed the strong top line performance to robust demand across most end markets:

“We experienced strong demand across most end markets in 2023 resulting in our highest sales and revenues on record…Overall demand remains healthy across our three primary segments.” [3]

The construction industries segment, Caterpillar’s largest, led the way with sales up 19% in the quarter. This segment benefited from increased demand for both large and small machines needed to support infrastructure and building projects globally.

Meanwhile, the energy and transportation segment posted a 14% increase in sales compared to last year thanks to higher end-user demand for reciprocating engines used in gas compression along with growth in aftermarket parts sales to support the transportation and marine industries. [4]

Outside of increased volume, Caterpillar was also able to drive higher revenues by implementing price increases to help offset inflationary cost pressures. This pricing power is a key element of the company’s margin expansion strategy.

Higher Margins Drive Record Operating Profit

In addition to record revenues, Caterpillar delivered significant operating margin expansion in the fourth quarter enabling the company to post record quarterly operating profit. Operating margins improved 470 basis points to 18.3% leading to operating profit of $3.1 billion, up 47% from the fourth quarter of 2022 and an all-time high. [5]

CFO Andrew Bonfield highlighted Caterpillar’s success at offsetting inflationary pressures to protect margins:

“The team remained focused on executing our strategy for long-term profitable growth…The benefits from higher sales volume and improved price realization more than offset manufacturing cost increases.”[6]

For the full year 2023, operating margins expanded 280 basis points to 15.3%, leading to record annual operating profit of $9.1 billion, up 30% compared to 2022. Management is targeting further margin expansion in 2024 driven by operating leverage and additional pricing actions. [7]

Financial Highlights Q4 2023 Q4 2022 Change
Revenue $17.1B $14.5B +18%
Operating Profit $3.1B $2.1B +47%
EPS $3.86 $2.28 +69%

Data Source: Caterpillar Earnings Release

EPS Soars 69% Boosted by Higher Margins and Share Repurchases

Driven by substantial operating margin expansion, Caterpillar posted fourth quarter earnings per share (EPS) of $3.86, which crushed Wall Street estimates of $3.19 per share. This represents an impressive 69% increase compared to EPS of $2.28 in the prior year period. [8]

For fiscal year 2023, EPS jumped 32% to $13.88 versus $10.51 in 2022, significantly outpacing revenue growth of 16%. This demonstrates the success of management’s strategy to drive earnings growth through improved profitability and Operating leverage rather than just relying on higher volumes.

Caterpillar has also aggressively repurchased its own shares under an $8 billion stock buyback program authorized last year, further boosting EPS. During 2023, the company repurchased $5.1 billion worth of Caterpillar stock which had the impact of reducing diluted shares outstanding by over 50 million. [9] Fewer shares means higher EPS all else equal.

Guidance Calls for Continued Growth in 2024

Alongside the strong fourth quarter results, Caterpillar issued an upbeat full-year guidance outlook for 2024. Management expects to deliver revenue growth in the range of 8-10% driven by expectations for healthy demand across most end markets. This points to 2024 revenues potentially topping $65 billion. [10]

Operating margins are expected to expand by at least 150 basis points in 2024 building on the substantial margin improvement achieved over the past two years. This margin expansion would drive double-digit growth in operating profit. [11]

Anticipating continued growth and strong cash generation, the company announced plans to hike its dividend by 8% marking the 29th consecutive year Caterpillar has raised its dividend. The company also plans to continue repurchasing its shares in 2024 after buying back $5.1 billion worth last year. [12]

Caterpillar CFO Andrew Bonfield summarized the positive outlook:

“2023 marked a record year for sales and revenues…We anticipate another good year in 2024 and expect total sales to increase based on continued strong demand across most end markets.” [13]

Shares Hit New Highs on Big Earnings Beat

Caterpillar stock surged over 5% to a new all-time high of $318 per share following the better than expected fourth quarter earnings report. The stock is now up over 10% year-to-date in 2024 continuing its strong run over the past few years. [14]

Driving the move higher is renewed confidence in Caterpillar’s ability to successfully navigate macro uncertainty and continued optimism around robust end market demand trends the company is seeing globally.

As UBS analyst Steven Fisher noted, the strong results demonstrate Caterpillar’s “earnings power and ability to outgrow uncertainty.” Meanwhile, Bank of America analyst Ross Gilardi highlighted the company’s “accelerating momentum from broad global economic expansion” underpinning the upbeat guidance. [15]

With the post-earnings gains, Caterpillar shares are now up over 25% from their 52-week lows back in September 2023 when recession fears were more heightened. Improving macro data, resilient non-residential construction activity in North America and optimism around a rebound in China have all contributed to the renewed bullishness. [16]

Many analysts have raised their price targets on Caterpillar stock following the big earnings beat. UBS boosted its target to $350 per share which would represent nearly 10% additional upside from current levels. Meanwhile, Citigroup raised its target to $290 asserting the results provide a blueprint for what EPS and free cash flow could look like in 2025. [17]

Overall, Wall Street sentiment remains highly constructive on Caterpillar stock with over 75% of analysts maintaining buy ratings. The average analyst price target of $326 implies upside potential of nearly 5% over the next 12 months before accounting for the company’s above market dividend yield. [18]

With end market demand holding up better than feared amid global economic uncertainty, Caterpillar seems poised to continue delivering double-digit earnings growth in 2024. This outlook combined with an undemanding forward valuation of just 15x earnings makes the stock an attractive pick for investors seeking industrial exposure.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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