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Caterpillar (CAT) Q2 Earnings Beat, Up Y/Y on Increased Demand

Caterpillar Inc. CAT reported second-quarter 2021 adjusted earnings per share of $2.60, which beat the Zacks Consensus Estimate of $2.38 by a margin of 9%. The bottom line surged 105% from the prior-year quarter as all of its segments reported improved performances courtesy of higher demand in end markets and across all geographies, which helped counter inflated input costs.

Including one-time items, Caterpillar’s second-quarter earnings per share was $2.56, reflecting a whopping growth of 205% from the prior-year quarter figure of 84 cents.

Improving Demand Spurs Revenues

The company’s second-quarter revenues of $12.9 billion surpassed the Zacks Consensus Estimate of $12.4 billion. The top line indicated an improvement of 29% from the year-ago quarter.

This upbeat performance was driven by increasing sales volume courtesy of higher end-user demand for equipment and services, and the impact from changes in dealer inventories. Dealers lowered their inventories by $400 million during the reported quarter compared to a decrease of $1.4 billion in the prior-year quarter, due to the coronavirus pandemic. Favorable currency impacts related to the Australian dollar, euro and Chinese yuan, and favorable price realization contributed to sales growth.

Caterpillar Inc. Price, Consensus and EPS Surprise

Caterpillar Inc. Price, Consensus and EPS Surprise

Caterpillar Inc. price-consensus-eps-surprise-chart | Caterpillar Inc. Quote

Sales in Latin America impressed with year-over-year growth of 67% followed by EAME, which witnessed an increase of 33% in sales. Sales in North America were up 30%, while the same in Asia/Pacific rose 12%.

Higher Sales Volume Drive Margin Expansion

In second-quarter 2021, cost of sales increased 25% year over year to $8.9 billion. Manufacturing costs were higher in the quarter due to inflated material costs, higher short-term incentive compensation expense, and higher labor related costs. Gross profit surged 39% year over year to $4 billion, primarily on the back of improved sales, which offset higher costs. Gross margin was 31.2% in the quarter under review compared with 28.8% in the prior-year quarter.

Selling, general and administrative (SG&A) expenses increased 15.7% year over year to around $1.4 billion. Research and development (R&D) expenses surged 31% to $446 million. Both SG&A and R&D expenses in the quarter were up year over year due to higher short-term incentive compensation expense, which was reinstated this year.

Adjusted operating profit in the quarter soared 95% year over year to $1.8 billion. Increased volumes, higher profit from Financial Products and favorable price realization were instrumental in driving the improved performance. These gains were partially negated by higher SG&A and R&D expenses and increased manufacturing costs. Adjusted operating margin was 14.1% in the reported quarter, up 480 basis points from the prior-year quarter.

Segments Gain on High Demand

Machinery and Energy & Transportation (ME&T) sales rose 31% year over year to $12.2 billion in the quarter under review. Construction Industries sales were up 40% year over year to $5.6 billion owing to increased sales volumes reflecting improving end-user demand for equipment and aftermarket parts and the impact from changes in dealer inventories. Favorable price realization and conducive currency impacts from the euro, Australian dollar and Chinese yuan also contributed to the improvement.

Sales at Resource Industries increased 41% year over year to around $2.6 billion on higher sales volume owing to changes in dealer inventories and higher end-user demand for equipment and aftermarket parts. The segment noted increased demand in heavy construction and quarry and aggregates as well as mining.

Sales of Energy & Transportation segment in the quarter were around $5 billion, reflecting growth of 20% from the prior-year quarter. Sales were up in Oil and Gas, Power Generation, Industrial and Transportation.

The ME&T segment reported operating profit of $1,653 million, which highlighted an improvement of 121% year over year. The Construction Industries segment witnessed a 98% surge in operating profit to $1 billion courtesy of higher volume, which offset higher manufacturing costs and SG&A, R&D expenses.

The Resource Industries segment’s operating profit soared 138% year over year to $361 million in the quarter under review as higher sales volume partially offset rising SG&A and R&D expenses. The Energy & Transportation segment’s operating profit went up 17% year over year to $731 million as benefits from higher sales volume were partly negated by increasing SG&A/R&D expenses.

Financial Products’ revenues inched up 1% to $774 million from the prior-year quarter. Financial Products' profits were $243 million in the reported quarter — an improvement of 64% year over year. This was due to lower provision for credit losses at Cat Financial, higher net yield on average earning assets and a favorable impact from returned or repossessed equipment, partially offset by an increase in SG&A expenses.

Strong Cash Position

In the six-month period ended Jun 30, 2021, operating cash flow was $4 billion compared with $2.5 billion in the prior year comparable period. The company returned $0.8 billion to shareholders through dividends and share repurchases in the second quarter. Caterpillar ended the quarter with cash and short-term investments of $10.8 billion, up from $9.3 billion as of 2020 end.

Price Performance

Over the past year, Caterpillar stock has gained 55.5%, compared with the industry’s rally of 56.4%.

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Image Source: Zacks Investment Research

Zacks Rank & Other Stocks to Consider

Caterpillar currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some other top-ranked stocks in the Industrial Products sector include Greif Inc. GEF, Dover Corporation DOV and Lindsay Corporation LNN. While Grief sports a Zacks Rank #1, Dover and Lindsay carry a Zacks Rank of 2, at present.

Greif has an estimated earnings growth rate of 47.1% for the ongoing year. The company’s shares have rallied 68.5% in the past year.

Dover has a projected earnings growth rate of 32.68% for 2021. Over the past year, the company’s shares have gained 57.9%.

Lindsay has an expected earnings growth rate of 17.3% for 2021. The stock has surged 63.7% in a year’s time.


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