Caterpillar Inc (CAT) Com Stk USD1 (CDI)

Caterpillar reported fourth quarter revenue gowth of 3%, to $17.1bn. Growth was led by higher prices and a small currency tailwind. A drop in sale volumes was driven by a $0.9bn decrease in dealer inventory, partially offset by higher sales of equipment to end users.

Underlying operating profit rose 15% to $3.2bn, with margins rising from 17.0% to 18.9%. The core construction businesses generated free cash flow of $3.2bn, up from $3.0bn a year ago.

Annual free cash flow targets have been raised from $4-8bn to $5-10bn, and full year 2024 cash flow is expected in the upper half of the new range. First quarter sales and underlying operating margin are expected to be in line with the year just passed.

The shares rose 4.6% in pre-market trading.

Our view

By most measures, 2023 was a knockout. A good chunk of the top-line growth fed straight into profit and cash flow. Markets have rewarded the stock for good performance, and taken note of an increase in both margin and cash flow guidance ranges for the coming year.

The bear case has centred around slowing demand and peak earnings for a few quarters now. While earnings are still strong, the order backlog continues to show signs that it's peaked. Nonetheless, we still see enough long-term drivers to make this an attractive name from here.

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 are 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.

Updated free cash flow guidance is 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.

Caterpillar offers indirect exposure to a range of end markets where we see several growth drivers. 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.

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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