Caterpillar Inc (CAT) Com Stk USD1 (CDI)

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Caterpillar’s fourth-quarter revenue fell 5% to $16.2bn due to weaker volumes. This was driven by declines across all three of the group’s core divisions, with the drops in Resource Industries and Energy & Transportation being 4-5% worse than market forecasts.

Operating profit fell at a slightly faster pace of 7% to $2.9bn, with lower volumes being the key driver.

The core construction business generated free cash flow of $3.0bn, down from $3.2bn.

Caterpillar expects first-quarter revenue to be “lower” than 2024’s level of $15.8bn. Underlying operating profit margins are also expected to weaken.

The shares were down 4.9% in pre-market trading.

Our view

Caterpillar’s fourth-quarter numbers were a touch softer than markets had hoped for. Lower volumes were the main driver due to weak end demand, although there was some slight pullback in prices too. The group’s outlook for 2025 points to a further decline on the top line so we could see Caterpillar come under further pressure in the near term.

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.

Despite some softening in the near-term outlook, we see longer-term 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 and Caterpillars products help make that a reality.

The AI wave is touching everyone and with huge investment in data centre buildouts, Caterpillar looks set to benefit. It’s increasing investment in some of its products that help support the buildout which we think is a smart move.

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.

Strong free cash flow was welcome news and helps to ease the 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. That cash flow also supports shareholder returns, with $10.3bn delivered in 2024 through dividends and buybacks – though no returns are guaranteed.

Caterpillar offers indirect exposure to a range of end markets. Looking further out, we remain confident in the longer-term industry growth drivers, and like Caterpillar as a business leader. We do see some uncertainty in the near term as the level of demand finds a level to settle at.

Environmental, social and governance (ESG) risk

General Industrial companies are medium risk in terms of ESG but can trend up to the higher end of the spectrum depending on subindustry. The primary risks can include labour relations, emissions (either product or production-based), business ethics and product governance. Other concerns are waste and health & safety.

According to Sustainalytics, Caterpillar’s management of material ESG issues is average.

Caterpillar prohibits bribery, requiring employees to complete yearly code of conduct training. While its audit committee oversees compliance, the company recently faced a U.S. investigation into tax and export practices, resulting in a settlement with the IRS in late 2022 without penalties. Caterpillar highlights its efforts in talent recruitment and development but lacks disclosures on employee turnover and the scope of its product quality certifications across manufacturing operations.

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.

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