Caterpillar, the world’s largest construction equipment manufacturer, announced better-than-expected fourth quarter earnings results today. Shares surged to record highs as the company saw recovering supply chains drive an increase in machine shipments and as robust demand continued in key markets like construction and mining.
Strong Beat On Both Revenue And EPS
The equipment giant reported fourth quarter revenue rising 11% over the prior year quarter to reach $17.1 billion, easily outpacing analyst expectations of $16.25 billion (Reuters). The revenue growth was driven by an increase in manufacturing operations and higher machine shipments as supply chain issues continue to alleviate. This supported a 18% jump in year-over-year sales in the company’s resource industries segment.
Meanwhile, adjusted EPS for the quarter climbed an impressive 48% versus the same quarter last year, landing at $4.00 per share compared to estimates of $3.80 (MarketWatch). Higher prices and lower manufacturing costs from improved supply chains drove the profit growth as operating margins increased 3 full percentage points over the year ago period to 18.1%.
|Key Highlights – Q4 2023
|$17.1 billion, +11% YoY, Beat $16.25B Estimate
|$4.00, +48% YoY, Beat $3.80 Estimate
|18.1%, +300 bps YoY
Demand Stays Strong Globally
Despite worries earlier in 2023 about an economic slowdown, demand has held up surprisingly well for Caterpillar’s earth moving equipment across most major markets. Sales accelerated in North America as well as the Europe, Africa and Middle East (EAME) region.
Geographically, total sales were up 14% in North America and a sizable 28% jump in the EAME segment as mining activity saw renewed investment (Construction Briefing). While sales to the Asia Pacific region slipped 2% as China demand remained weak, even Latin America saw a 12% increase in revenues.
Caterpillar CEO Jim Umpleby was very upbeat on the global demand environment, saying on the conference call “Overall demand remains healthy as dealers are selling off inventory about as fast as our factories are producing it” (ForexLive). He also continued to reiterate guidance for another solid year of revenue and EPS growth in 2024.
Construction And Mining Markets See Momentum
A key area driving results this past quarter was Caterpillar’s construction industries segment. Revenues here improved 12% to $7.3 billion as the sector continues experiencing strong tailwinds from robust commercial construction activity, state infrastructure budgets and pent-up demand for residential building. Operating margin for this division also saw impressive expansion, hitting an enviable 22.1% versus 18.4% in the year ago quarter due to higher prices and manufacturing efficiencies.
The company also posted record mining equipment sales, with revenues advancing 18% due to sizable increases from North American and Asian coal producers. Higher metals prices over the past year have encouraged miners to upgrade aging fleets and expand existing mines, a dynamic Caterpillar expects to continue through at least the medium term. Profitability also expanded in dramatic fashion for the mining group, with margins hitting 24%, a 620 basis point increase from Q4 of the prior year.
Lingering Supply Side Improvement
While manufacturers broadly struggled with supply chain constraints over the past 24 months, Caterpillar has been seeing a steady abatement of issues throughout the back half of 2022. Management again stated that manufacturing and parts availability continues trending favorably, although the situation is not fully back to normal. Lead times for trucks and excavators slipped modestly from the third to fourth quarter as factories operated near full utilization rates. The supply recovery supported a double digit percentage point gain in dealer inventories last quarter, the largest such jump since 2018. This stockpile of immediately available machines bodes well for the company’s order book as we move into the spring construction season.
At the same time as inventories build, Caterpillar has been successful pushing through additional price increases to protect margins in the face of lingering inflationary pressures. The manufacturer has raised rates 7% over the past year, supporting today’s margin outperformance versus estimates. Umpleby stated there remains flexibility to potentially increase prices further in 2023 if necessary.
Outlook Calls For Strong Sales And Profit Growth In 2023
As part of today’s report, management reaffirmed guidance calling for continuing robust revenue gains between 12-18% in 2023 along with a 20-30% surge in EPS for the full year (Yahoo Finance). This would translate into roughly $93-99 billion in total sales for the current year, a staggering result from last year’s record setting $81 billion top line figure. The expected profit expansion indicates anticipating little change in operating conditions, with demand and pricing power holding up while manufacturing protocols reach normalized levels.
If global growth concerns take further hold, one downside risk that may materialize is dealers paring back inventory restocking plans and tempering orders for new machinery. However, commentary from executives did not indicate any nervousness around end market disruption as of now. Assuming the macro picture remains steady, Caterpillar appears poised to continue executing at an extremely high level, driving further share price increases.
Shares Reach New All-Time High
Caterpillar shares surged as much as 7% in Tuesday’s session, hitting an intraday record of $285 following the better than expected results and strong guidance (Yahoo Finance). The move added over $13 billion in market capitalization in just a few hours of trading. The stock has been a strong performer over the past 12 months, returning 32% versus a 10% decline for the S&P 500 over the same timeframe.
Many analysts boosted their price targets following the release. Morgan Stanley sees shares reaching $300, which would mean another 5% of upside from current levels (StreetInsider). Meanwhile, Deutsche Bank feels the stock should trade around $307 per share as demand trends stay healthy in the near term (StreetInsider).
With many end markets still boasting momentum and years of backlogged infrastructure projects globally, Caterpillar seems to maintain an ideal position to continue posting sector beating results. Savvy investors would be prudent to monitor heavy equipment suppliers like CAT which enable and thrive on secular shifts toward renewables, technology infrastructure, mass transit and advanced global connectivity.
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