Interactive Investor

ii view: global bellwether Caterpillar issues cautious outlook

Providing worldwide exposure to construction, mining and energy, this iconic US company boasts an enviable track record of dividend growth. We assess prospects.

31st October 2023 15:43

Keith Bowman from interactive investor

Third-quarter results to 30 September  

  • Revenue up 12% to $16.8 billion
  • Adjusted earnings per share up 40% to $5.52
  • Quarterly dividend of $1.30 per share, unchanged from the previous quarter

Chief executive Jim Umpleby said:

“I’d like to thank our global team for delivering another great quarter, as demonstrated by double-digit top-line growth, strong adjusted operating profit margin and robust Machinery, Energy & Transportation (ME&T) free cash flow. We remain focused on supporting our customers’ success and executing our strategy for long-term profitable growth.”

ii round-up:

Digger maker Caterpillar Inc (NYSE:CAT) today reported improved quarterly revenues, helped along by higher product prices, although it has issued a cautious outlook given an order book down on the prior quarter.

Third-quarter sales climbed 12% year-over-year to $16.8 billion, pushing adjusted earnings per share up 40% to $5.52, beating Wall Street hopes for $4.45 per share. But a $2.6 billion decline in its order book from the prior second quarter suggests softening demand. 

Shares in the Dow Jones constituent fell 5% in early US trading having come into this latest news little changed year-to-date. That’s similar to the Dow Jones index itself, although better than a 10%-plus fall for rival industrial machine maker Deere & Co (NYSE:DE) in 2023. 
   
Caterpillar helps customers pave roads, mine essential commodities and extract fuels to satisfy global energy demand. It previously bought the oil and gas equipment division of the UK’s Weir Group (LSE:WEIR).

Construction related equipment revenues led the way during this latest quarter, gaining 12% to almost $7 billion, followed by an 11% gain in energy and transportation sales to $6.85 billion, and 9% growth for mining equipment. 

Caterpillar previously declared a quarterly dividend of $1.30 per share, unchanged from the prior quarter, although better than the $1.20 declared this time last year. Shareholder returns during the third quarter including dividends share buybacks totalled $1 billion, down from $2 billion in Q2.  

Fourth-quarter and full-year 2023 results are likely to be announced late January or early February. 

ii view:

With a history dating back almost 100 years, Caterpillar today operates across the three primary divisions of construction industries, resource industries and energy and transportation. Employing over 100,000 people, its home US market accounts for its biggest slug of sales at around two-fifths. Europe and Africa and Asia Pacific each account for around a fifth and Latin America just over a tenth. 

For investors, a reduced group order book could be pointing towards lower customer demand against an economic backdrop of heightened interest rates. Costs generally for businesses remain elevated, while environmental concerns overshadow its business sectors such as energy warrant consideration. A current net asset value to share price ratio above the three-year average may also suggest the shares are not obviously cheap. 

On the upside, sales volumes are up year-over-year, with product price increases being swallowed by customers, likely countering elevated costs. The company is diverse both by product and geography, it has cash on the books of $6.5 billion, while a record of increasing the annual total dividend for more than 25 years is enviable and has the shares offering a forecast yield of around 2% (not guaranteed). 

On balance, and while some caution looks sensible, this giant of the industrial machinery world arguably continues to justify its place in diversified portfolios.  

Positives: 

  • Product and geographical diversity
  • More than 25 years of consecutive annual dividend increases

Negatives:

  • Subject to currency moves
  • Uncertain economic outlook

The average rating of stock market analysts:

Strong hold

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