Caterpillar Inc. CAT is anticipated to record top and bottom-line declines when it reports third-quarter 2024 results on Oct. 30, before the opening bell.
The Zacks Consensus Estimate for third-quarter 2024 earnings has moved down 0.6% over the past 60 days to $5.33 per share. The consensus mark implies a 3.4% dip from the year-ago actual. The Zacks Consensus Estimate for revenues is pegged at $16.35 billion, suggesting a 2.7% year-over-year decline.
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Find the latest earnings estimates and surprises on Zacks Earnings Calendar.
CAT’s Solid Earnings Surprise History
Caterpillar’s earnings outpaced the Zacks Consensus Estimates in the trailing four quarters, the average surprise being 10.95%. This is depicted in the following chart.
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What the Zacks Model Unveils for the CAT Stock
Our proven model does not conclusively predict an earnings beat for Caterpillar this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that is not the case here.
Earnings ESP: CAT has an Earnings ESP of -0.94%. You can uncover the best stocks before they are reported with our Earnings ESP Filter.
Zacks Rank: The company currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Factors Likely to Have Shaped CAT’s Q3 Performance
The Institute for Supply Management’s manufacturing index was below 50% in the July-September period, which indicates contraction. The New Orders Index also stayed below 50% as companies refrained from making capital investments. The impacts of this are expected to get reflected in Caterpillar’s third-quarter order levels. However, CAT’s substantial backlog of $28.6 billion at the beginning of the quarter, and higher aftermarket parts and service-related revenues are likely to have supported its third-quarter top line.
This is expected to have been negated by lower dealer inventories in the quarter, per normal seasonal trends in the third quarter. Caterpillar had seen unusually high dealer inventories in the third quarter of 2023, creating a challenging comparison for the quarter to be reported. Volumes are also expected to have been impacted by weak demand in some of its markets.
Overall, lower volumes and pricing are expected to have weighed on CAT’s top-line performance in the quarter under review.
Caterpillar has been witnessing moderate input cost inflation lately. We expect the company’s cost of sales to decline 7.1% in the third quarter due to favorable manufacturing costs. We, however, anticipate increased selling general and administrative (SG&A), and research and development (R&D) expenses related to strategic investments for the quarter. The projected year-over-year rise in SG&A and R&D expenses are at 5.7% and 8.9%, respectively, for the third quarter.
Savings from Caterpillar’s cost-control measures and restructuring actions are likely to have negated some of these setbacks. Our model projects a 3.64% year-over-year decrease in operating income to $3.37 billion. We expect the operating margin to be 20.8%, implying no change from that reported in the third quarter of 2023. The impacts of lower volumes on margins are expected to have been offset by favorable manufacturing costs.
Here’s How CAT’s Segments are Placed for Q3 Earnings
Our model projects the Resource Industries segment's external sales at $3 billion for the third quarter, indicating a 7% year-over-year decline. We expect an 8.5% dip in volume for the segment, partially offset by a 1.8% increase in pricing. The projection for lower volumes primarily reflects the ongoing weakness in demand.
The segment is expected to report an operating profit of $668 million, suggesting an 8.5% year-over-year decline. The segment’s operating margin is projected to be 22%, slightly lower than 22.4% in third-quarter 2023 due to unfavorable volume, and higher SG&A and R&D spending.
The Construction segment’s external sales are projected at $6.48 billion, indicating a decline of 7.2% from the year-ago quarter’s actual, led by a 5.3% dip in volume, partially offset by a 1.3% dip in pricing. While demand in non-residential and residential construction in North America is expected to have been favorable, weak demand in the Asia Pacific and Europe is expected to have weighed on volumes. The above-10-ton excavator market in China has been impacted due to the slowdown in its real estate industry. Changes in dealer inventory are also expected to have acted as headwinds in the quarter.
The Construction segment’s operating profit is projected to be $1.68 billion, indicating a year-over-year decline of 9%. We project the segment’s margins to be 26%, implying a dip from the year-ago quarter’s 26.5%. Gains from favorable manufacturing costs are expected to have been negated by lower volume and unfavorable price realization.
For the Energy & Transportation segment, we expect external sales to be $5.86 billion, suggesting a 1.8% rise from the year-ago quarter’s actual. Volume growth is projected to be 1.2%, reflecting improved demand across Oil & Gas, Power Generation, and Transportation, offset by weak demand in industrial. Pricing is expected to contribute 1.4% to the segment’s sales growth.
The consensus estimate for the segment’s operating profit is pegged at $1.2 billion for the third quarter of 2024, suggesting 2.5% year-over-year growth. The operating margin is projected to be 20.7% for the third quarter, implying a rise from the 20.5% reported in the prior-year quarter.
CAT’s Price Performance & Valuation
Caterpillar has appreciated 58% in the past year, outperforming its industry’s 53.7% growth. It has also outpaced the broader Zacks Industrial Products sector’s 31.9% rise and the S&P 500’s climb of 38.4%.
CAT’s Price Performance Against Industry & Broader Market
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The stock’s performance has been upbeat compared with its peers. Shares of Terex TEX and Komatsu KMTUY have risen 14% and 4.5%, respectively, in the past year. Astec Industries ASTE has witnessed a decline of 25% in the same period.
CAT is currently trading at a forward 12-month P/E of 14.37, at a premium compared with the industry’s 11.15X. The stock is also not cheap when compared with Komatsu, Terex and Astec, all of which are currently trading below the industry.
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Investment Thesis on CAT
Caterpillar’s long-term demand prospects are well-supported by increased infrastructure spending and the ongoing shift toward clean energy. Its focus on growing service revenues, which generate higher margins, is a strategic move. Its global footprint, competitive cost position, focus on innovation and ability to ramp up production position CAT well to ride on market opportunities. A strong financial position enables it to invest in its businesses and return cash to shareholders through share buybacks and dividend payments. However, the weakness in the 10-ton and above excavator market in China, which had been one of its largest markets previously, remains concerning.
How Should You Play CAT Pre-Q3 Earnings?
Caterpillar's performance has always been closely watched by investors, as it serves as a key economic indicator for the sector. In third-quarter 2024, the impacts of weaker volumes, and elevated SG&A and R&D expenses are expected to have offset gains from favorable manufacturing costs and its cost-saving actions. If the company’s earnings decline as expected, it would put an end to its enviable stint of positive earnings growth for 14 straight quarters. This run demonstrated CAT’s resilience despite significant challenges throughout the period, including the pandemic, supply-chain disruptions and prolonged contraction in the manufacturing sector.
No matter how the upcoming quarterly results play out, investors who already own CAT shares should retain the stock in their portfolios to benefit from its solid long-term fundamentals. However, given its premium valuation, new investors can wait for a better entry point.
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