Caterpillar (CAT) Up 7.3% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Caterpillar (CAT). Shares have added about 7.3% in that time frame, outperforming the S&P 500.Will the recent positive trend continue leading up to its next earnings release, or is Caterpillar due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers. Caterpillar Q3 Earnings & Revenues Miss Estimates on Low VolumesCaterpillar reported third-quarter 2024 adjusted earnings per share of $5.17, which missed the Zacks Consensus Estimate of $5.33 by a margin of 3%. The bottom-line figure was 6% lower than the year-ago quarter. This marked an end to CAT’s enviable stint of delivering improved earnings for 14 straight quarters. Improved results in the Energy & Transportation segment were offset by weaker volume performances at the Construction Industries and Resource Industries segments. The volume declines in the two segments were attributed to lower sales to end users as well as changes in dealer inventories.Including one-time items, Caterpillar’s earnings per share were $5.06, down 7% from $5.45 in the year-ago quarter.Caterpillar’s Revenues Dip on Low VolumesCaterpillar reported third-quarter revenues of around $16.1 billion, which missed the Zacks Consensus Estimate of $16.35 billion by a margin of 1.5%. The top line declined 4% year over year as favorable price realization was offset by an overall decline in volumes (dragged down by the Construction Industries and Resource Industries segments).Latin America was the only region that delivered a 5% year-over-year improvement in revenues in the quarter. This was offset by a revenue decline of 7% in Asia Pacific, 6% in EMEA and 4% in North America.CAT’s Margins Contract in Q3The cost of sales decreased 5% year over year to $10.1 billion. Gross profit was down 3% to$6 billion from the prior year’s quarter due to lower sales volumes. The gross margin was 37.5% compared with 37% in the year-ago quarter.Selling, general and administrative expenses increased 2.8% year over year to around $1.67 billion. Research and development expenses were down 3.8% to $533 million. CAT reported an operating profit of around $3.15 billion, an 8.8% decline from the year-ago quarter as favorable price realization was offset by lower volumes. The operating margin was 19.5%, down from 20.5% in the year-ago quarter.Adjusted operating profit was around $3.22 billion, down 8% from the year-ago quarter. The adjusted operating margin was 20% compared with 20.8% in the third quarter of 2023.Caterpillar’s Segment Performances in Q3Machinery and Energy & Transportation (ME&T) sales dipped 5% year over year to around $15.2 billion . Construction Industries' sales were down 9% year over year to $6.35 billion on lower sales of equipment to end users and unfavorable price realization. Sales increased 19% in Latin America but declined 15% in EAME, 12% in Asia/Pacific and 11% in North America. Sales in the Resource Industries segment were down 10% year over year to around $3 billion. Lower volumes, due to weak end market demand, offset favorable price realization. Sales were flat in Latin America but down 17% in North America, 13% in EAME and 3% in Asia/Pacific. Sales of the Energy & Transportation segment were around $7.2 billion, reflecting growth of 5% driven by favorable price realization and improved sales volumes. The segment reported sales growth in Power Generation (26%) and in Transportation (3%). However, sales to the Industrial sector and the Oil and Gas sector were down 16% and 1%, respectively. North America witnessed growth of 8%, followed by a 4% rise in EAME. Asia/Pacific and Latin America, however, reported declines of 5% and 2%, respectively. The ME&T segment reported an operating profit of $3.1 billion, down 9% year over year. The Energy & Transportation segment reported a 21% year-over-year increase in operating profit to $1.43 billion. The Construction Industries segment’s operating profit declined 20% year over year to $1.149 billion. The Resource Industries segment’s operating profit was down 15% year over year to $0.6 billion. Financial Products’ total revenues rose 6% from the year-ago quarter to $1 billion due to higher average financing rates across all regions and increased average earning assets in North America. The segment reported a profit of $246 million compared with $203 million in the second quarter of 2023.Caterpillar’s Cash PositionOperating cash flow was $3.6 billion for the third quarter. In the first nine-month period of 2024, the company returned around $9 billion to shareholders as dividends and share repurchases. CAT ended the quarter with cash and equivalents of around $5.6 billion, lower than the cash holding of around $7 billion at 2023-end. CAT’s Expectations for Q4 & 2024The company anticipates sales in the fourth quarter to be slightly lower than last year’s quarter. The decline in dealer inventories of machines is expected to be less than $1.4 billion reported in the last year’s quarter. Machine sales to end users will be lower compared with a stronger fourth quarter of 2023. The fourth-quarter adjusted operating margin will be lower sequentially due to seasonality.Caterpillar expects 2024 revenues to be slightly lower than the record 2023 revenues of $67 billion. Adjusted operating profit margin is expected to be above its target range corresponding to the anticipated level of revenues. At revenues of around $64.5 billion, the projected adjusted operating profit target range is 16-20%. Both adjusted operating profit and earnings per share are likely to be higher than previous expectations. Caterpillar expects ME&T free cash flow to be in the top of its targeted range of $5-$10 billion.How Have Estimates Been Moving Since Then?It turns out, estimates review have trended upward during the past month.VGM ScoresCurrently, Caterpillar has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.OutlookEstimates have been trending upward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Caterpillar has a Zacks Rank #3 (Hold). 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