Should You Buy, Hold or Sell Caterpillar Stock After Q3 Earnings?

Caterpillar Inc. CAT recently reported year-over-year declines in its top and bottom lines for the third quarter of 2024, which lagged the Zacks Consensus Estimates. This ended CAT’s stint of improved earnings for 14 straight quarters, which showed the company’s resilience through challenges during these quarters, including the pandemic, supply-chain disruptions and slowdown in manufacturing.Caterpillar expects 2024 revenue to be below its August forecast, which said that full-year revenues would be “slightly lower” than that reported in 2023. CAT, however, maintained the adjusted operating profit margin above its target range.CAT shares have dipped 2% since the earnings release on Oct. 30, leaving investors weighing whether to increase their stake or hold on to their current investments. Let us delve deeper into the third-quarter results and evaluate the stock’s fundamentals.Breaking Down Caterpillar’s Q3 PerformanceCAT’s revenues declined 4% year over year to $16.1 billion, as favorable price realization was offset by an overall decline in volumes (dragged down by the Construction Industries and Resource Industries segments). Earnings per share was $5.17, 6% lower than the year-ago quarter.The Energy & Transportation segment was the only segment to deliver year-over-year improved volumes, revenues and operating profit. This was offset by weak performances in Construction Industries and Resource Industries, which faced volume declines due to lower equipment sales to end users, dragging their revenues and profits. For an in-depth analysis of CAT’s Q3 earnings, read: Caterpillar Q3 Earnings & Revenues Miss Estimates on Low Volumes.Solid Cash Position: Caterpillar’s operating cash flow for the quarter was $3.6 billion. Through the first nine months of 2024, the company returned $9 billion to shareholders as dividends and share repurchases. CAT ended the quarter with cash and equivalents of $5.6 billion. Robust Backlog Levels: The company ended the third quarter with a backlog of $28.7 billion, which rose $0.1 billion sequentially. Its backlog, as a percentage of revenues, is higher than historic levels and will support revenues in the forthcoming quarters.Revenue Guidance Lowered, Margins Intact: Caterpillar expects 2024 revenues to be a tad lower than the prior estimate. It initially forecast revenues to be “slightly lower” than the record $67 billion reported in 2023. Despite the tepid revenue expectations, the adjusted operating margin is expected to exceed CAT’s target range.The company maintains its guidance of revenues at $42-$72 billion. According to the revenue levels, margins are expected between 10% and 22%. This is shown in the chart below.CAT's Guidance Range Image Source: Caterpillar Caterpillar’s shares dipped post the disappointing results. Yet, its year-to-date performance has been ahead of the industry. So far this year, the CAT stock has gained 28.4% compared with the industry’s 25% growth. In comparison, the Zacks Industrial Products sector and the S&P 500 have risen 11.4% and 20.5%, respectively, in the same period.CAT’s YTD Price Performance Image Source: Zacks Investment Research Upbeat Earnings Growth Projections For CATEarnings estimates for Caterpillar have moved down 0.3% for 2024 and 1.3% for 2025 over the past seven days. Image Source: Zacks Investment Research Find the latest EPS estimates and surprises on Zacks Earnings Calendar.Notwithstanding the downward activity, the Zacks Consensus Estimate for 2024 indicates year-over-year growth of 2.9%, and the same for 2025 suggests 1.3% growth. CAT has a long-term EPS growth rate of 9.3%. Image Source: Zacks Investment Research Few Near-Term Concerns Prevail for CaterpillarPersisting Low Volume Trends: Caterpillar has been witnessing a decline in overall volumes in the four consecutive quarters. This mainly reflected muted consumer spending amid the current inflationary scenario. The Resource Industries segment’s volume declined in the last five quarters. Construction Industries’ volume growth has been in the red over the past four quarters.Weak Demand in China: Due to the slowdown in China's real estate industry, its construction industry has taken a hit. Caterpillar is expected to continue to see weak demand for the 10-ton and above excavator market in China, which had previously been one of its largest markets. China’s previous stimulus measures failed to impress investors. They are now closely watching the five-day National People’s Congress meeting in China, wherein authorities are expected to announce further details on debt and fiscal initiatives to revitalize economic growth.Contraction in the Manufacturing Sector: The Institute for Supply Management’s manufacturing index registered 46.5% in October, hitting the lowest in 2024. It has been in the contraction territory (with a reading below 50%) for the past seven months. The New Orders Index was 47.1%, contracting for the seventh consecutive month in October. The Index has not delivered consistent growth since the end of its 24-month expansion streak in May 2022.CAT’s Premium ValuationCAT is currently trading at a forward 12-month P/E of 17.2, at a premium compared with the industry’s 16.3. The stock is also not cheap when compared with Komatsu KMTUY, Terex Corporation TEX and The Manitowoc Company MTW, which are currently trading below the industry at 10.05, 9.57 and 9.91, respectively. Image Source: Zacks Investment Research CAT’s Long-Term Prospects IntactThe increase in projects enabled by the U.S. Infrastructure Investment and Jobs Act creates massive opportunities for Caterpillar’s wide range of construction equipment. Worldwide efforts to transition to clean energy will require a vast amount of commodities, which, in turn, will boost the demand for Caterpillar’s mining equipment. Miners are increasingly relying on autonomy to increase productivity and efficiency, and improve safety. CAT’s focus on enhancing its autonomous fleet will provide a competitive edge.In Energy & Transportation, strong order rates in most applications are expected to support revenues. In the Oil & Gas sector, the increased focus on sustainability will drive the demand for CAT equipment. As technology companies establish data centers globally to support their generative AI applications, the company is witnessing robust order levels for reciprocating engines for data centers. It is planning to double its output with a multi-year capital investment.CAT has been seeing growth in aftermarket parts and service-related revenues, which generate high margins. The company is on track to double its service revenues from $14 billion in 2016 to $28 billion in 2026.CAT Offers Attractive Dividend Yield & PayoutThe company has a five-year dividend growth rate of 6.9%. CAT's 1.49% dividend yield is higher than the sector’s yield of 1.33% and the S&P 500’s 1.24%. CAT has a payout ratio of 24.15%, higher than the industry’s 22.5%. The company has a solid track of paying higher dividends to shareholders for 30 straight years.How Should Investors Approach CAT Stock Post Q3 Earnings?The decline in volumes in Caterpillar’s major two segments has been weighing on its performance. The prolonged contraction in the U.S. manufacturing sector and weak demand in China add to the concerns.  New investors should wait for a better entry point, given its higher valuation. However, existing shareholders should stay invested in the CAT stock to benefit from its solid long-term demand prospects, backed by infrastructure spending and energy-transition trends, as well as its focus on growing service revenues. Caterpillar’s strong financial position enables it to invest in its businesses and return cash to shareholders through share buybacks and consistent dividend payments. The company currently has a Zacks Rank #3 (Hold), which supports our thesis.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Research Chief Names "Single Best Pick to Double"From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.This company targets millennial and Gen Z audiences, generating nearly $1 billion in revenue last quarter alone. A recent pullback makes now an ideal time to jump aboard. Of course, all our elite picks aren’t winners but this one could far surpass earlier Zacks’ Stocks Set to Double like Nano-X Imaging which shot up +129.6% in little more than 9 months.Free: See Our Top Stock And 4 Runners UpWant the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report The Manitowoc Company, Inc. (MTW): Free Stock Analysis Report Caterpillar Inc. (CAT): Free Stock Analysis Report Terex Corporation (TEX): Free Stock Analysis Report Komatsu Ltd. (KMTUY): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks