Caterpillar Inc. (NYSE:CAT) is reaping the rewards of heightened demand within its target markets and disciplined cost-management strategies. These achievements are evident in its impressive streak of ten consecutive quarters of year-over-year growth in both revenue and earnings. This is particularly remarkable considering the prevailing challenges of inflationary pressures and supply chain disruptions, not only for Caterpillar but for the entire industry.
CAT’s substantial backlog and optimistic prospects across its segments position it favorably for promising outcomes in the forthcoming quarters. The company’s ongoing investments in expanding its product range, enhancing services, and advancing digital initiatives are expected to play a pivotal role in driving its growth trajectory.
At present, Caterpillar proudly holds a Zacks Rank #1 (Strong Buy).
Let’s delve deeper into the factors that underscore the attractiveness of this stock at this juncture.
Impressive Q2 Performance & Robust Backlog Levels
In the second quarter of 2023, Caterpillar’s adjusted earnings per share reached $5.55, reflecting a notable 74.5% year-on-year improvement. Despite challenges related to manufacturing costs, the company’s earnings were bolstered by robust demand across the majority of its end markets and favorable price adjustments.
As of the end of the quarter, Caterpillar’s backlog stood at an impressive $30.7 billion. This robust backlog level bodes well for the company’s top-line performance in the upcoming quarters.
Positive Earnings Surprises and Encouraging Growth Projections
Over the past four quarters, Caterpillar has consistently outperformed earnings expectations, with an average earnings surprise of 18.5%.
The Zacks Consensus Estimate for Caterpillar’s earnings in 2023 has experienced a 10% upward revision over the past 30 days, currently pegged at $19.82 per share. This estimate reflects a substantial 43.2% growth compared to the previous year’s reported figure.
Looking ahead to fiscal year 2024, the consensus estimate for earnings stands at $21.22 per share, indicating a 7% year-over-year improvement. This estimate has experienced a notable 14% increase over the past 30 days.
Caterpillar is anticipated to achieve a commendable long-term earnings growth rate of 12%.
Robust Demand Driving Top-Line Expansion
In the North American region, increased demand within the residential and non-residential construction sectors is poised to drive Caterpillar’s construction equipment sales. The notable investments in infrastructure—stemming from the U.S. Infrastructure Investment and Jobs Act—present a substantial opportunity for CAT. In the Asia Pacific region (excluding China), elevated commodity prices, a resilient housing market, and augmented government expenditure on infrastructure projects are set to boost sales of construction equipment. Moreover, heightened construction activities are projected to drive machine demand in the EAME and Latin American regions.
Within the Resource Industries segment, there is an encouraging uptick in mining orders, which bodes well for Caterpillar. The adoption of autonomous systems by mining companies to enhance productivity and cost efficiency further supports the company’s outlook. Caterpillar’s focus on enhancing autonomous capabilities and introducing innovative products positions it strategically in this regard. In the Energy and transportation segment, robust order rates across various applications are expected to bolster revenues.
Stable Financial Foundation
Caterpillar maintains a robust cash and liquidity position, with the company generating an operating cash flow of $4.8 billion during the first half of 2023. As of June 30, 2023, the company held cash and short-term investments totaling $7.4 billion. Meanwhile, its ME&T (Machinery, Energy & Transportation) debt stood at $8.5 billion. The company’s times interest earned ratio has experienced significant improvement over the years and currently stands at 9.5.
Caterpillar’s commitment to rewarding shareholders is evident through its 8% increase in quarterly dividends earlier this year. The company’s consistent dividend growth for 29 consecutive years places it as a member of the S&P 500 Dividend Aristocrat Index. With a dividend yield of 1.89%, Caterpillar surpasses both the industry average of 1.87% and the S&P 500’s yield of 1.44%. The company boasts a five-year dividend growth rate of 7.4% and a payout ratio of 27.4%, which outperforms its industry peers.
Focused Growth Strategies
Caterpillar’s ongoing dedication to its customers and its forward-looking approach is evident in its consistent investments in digital capabilities, asset connectivity, and the development of innovative, efficient products. The company’s steadfast commitment to expanding its product and service offerings, along with digital initiatives such as e-commerce, positions it well for sustained long-term growth.
Price Performance
Over the past year, Caterpillar’s shares have surged by 52.9%, outpacing the industry’s growth rate of 52.5%. This positive price performance underscores the company’s resilience and strategic positioning in the market.
Featured Image: Unsplash
Author Faith Yakubu 
