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Caterpillar - profits pop, soaring ahead of estimates

Caterpillar reported 17% growth in first-quarter revenue to $15.9bn. Growth was broad-based across the three major business segments...

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Caterpillar reported 17% growth in first-quarter revenue to $15.9bn. Growth was broad-based across the three major business segments. Higher prices were the main contributor, and sales volumes grew in two out of the three main segments, Construction Industries being the exception.

Underlying operating profit, which removes restructuring costs, rose 79% to $3.3bn. That was mainly driven by higher prices and, to a smaller extent, improved volumes.

Free cash flow of $1.2bn was up from a small outflow the prior year due to higher profits. Net debt stood at $30.2bn, broadly flat over the period.

In line with normal seasonality, Caterpillar expects second-quarter sales to rise but underlying operating profit to fall. For the full year, underlying operating margin is expected in the top half of the target range, which caps out at 18-21%.

Through buybacks and dividends, $1.0bn was returned to shareholders over the period.

The shares were broadly flat in pre-market trading.

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Our view

By most measures, first quarter performance was a knockout. A good chunk of the top line growth fed straight into profit and cash flow. But the market reaction was muted, perhaps a case of 'is this the best it'll get' mentality.

The bears will point to rising inventory levels with dealers and an order backlog that was relatively flat as indicators that things are set to slow from here. There's certainly merits to that, but we see enough growth drivers to push things forward.

For nearly a century, the company's built mission-critical heavy machinery, which has led to its position as one of the world's most valuable brands. Three key pillars underpin the business model; Construction Industries, Resource Industries and Energy & Transportation.

We can find positives in all three. Infrastructure spend has tailwinds from government-related investment in the US. For mining equipment, commodity prices have come down, but remain high enough for continued investment. Longer term, we see increased demand for materials that help support the global energy transition. It's Caterpillar's product range that can support that. There's also innovative solutions brought to the table with autonomous mining vehicles which have so far shown to increase productivity by 30%.

In Energy & Transportation, demand for oil & gas related products could well be peaking. It's in the more environmentally friendly offerings that we see longer-term potential, innovations like green hydrogen generators can help end customers meet their climate-related objectives.

Running across all three segments is the services offering, where Caterpillar offers repairs and upgrades throughout its products' life cycles. This helps support revenue streams and is an offering that's going from strength to strength.

Consensus is for $6.7bn of free cash flow this year, which helps to ease pressures that the heavy debt load brings. As a mature business, it can stomach a higher debt load, and levels relative to profits have been steady over time. But still, $30.2bn in net debt does add some risk.

Caterpillar offers indirect exposure to a range of end markets where we see several growth drivers. The valuation compared to longer term averages varies depending on the metrics used. Broadly speaking, we think a good chunk of the short-term prospects are reflected in the price, but we see potential for longer-term investors. It's also important to remember the Group would be exposed to an unexpectedly bad economic downturn.

Caterpillar key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 27th April 2023