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Caterpillar - revenue and earnings beat expectations

Caterpillar reported second-quarter revenue of $17.3bn, a rise of 22% and ahead of market expectations.

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Caterpillar reported second-quarter revenue of $17.3bn, a rise of 22% and ahead of market expectations. Growth was driven by higher volumes, which benefited from rising sales to end-users and an increase in dealer inventories, and rising prices.

Operating profit rose 88% to $3.7bn, driven by higher revenue which more than offset an increase in costs and investment. Operating margin also improved from 13.6% to 21.1%.

Group free cash flow was up from $1.7bn to $3.7bn. The Machinery, Energy and Transportation (ME and T) segments generated $2.6bn in free cash. $2.0bn was returned to shareholders over the quarter.

Third-quarter revenue and margins are expected to be lower quarter-on-quarter, but higher than the prior year.

The shares were broadly flat in pre-market trading.

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Our view

By most measures, first-half performance was a knockout. A good chunk of the top-line growth fed straight into profit and cash flow. But the market reaction has been somewhat 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's been relatively flat for a couple of quarters as indicators that things are set to slow from here. There are 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 gone from strength to strength.

Analyst's have significantly increased their estimates for free cash flow in recent months, a testament to strong performance over the half. It's now expected around $8.2bn for the 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.

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 valuation, 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
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: 1st August 2023