Caterpillar (CAT) Quarterly Report for Maverick Investors

November 5, 2023,   $240.75

Business Overview:

  • Caterpillar Inc. is a global manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. Its product range includes a variety of machinery and tools for construction, mining, and related industries. The company also provides financing and insurance services for its products. Caterpillar, founded in 1925, is based in Irving, Texas.

Maverick Guidance:

  • Short-term technical buy/sell recommendation: SOLD 16Oct23
  • Long-term portfolio recommendation: ANY Q4 BUY WOULD BE AT HIGH RISK. TECHNICAL SUPPORT IS $180 (-25% LOWER THAN CURRENT PRICE).
  • Global economic headwinds cannot be ignored at this point.

Consideration for Maverick Portfolio:

  1. Appropriate for risk profile score of 22-29. The Moderate Investor seeks to balance caution and ambition, aiming for reasonable growth while managing risk. The Maverick MODERATE GROWTH portfolio is designed to maintain a stable yet potentially rewarding financial strategy by including conservative and moderately aggressive Dow 30 stocks.
  2. Appropriate for risk profile score of 30-35. The Moderately Aggressive Investor is willing to take on higher risk for the potential of higher returns. The Maverick DYNAMIC GROWTH portfolio includes a higher allocation of high-growth-oriented Dow 30 stocks to align with this risk-tolerant approach.
  3. Appropriate for risk profile score of 36-45. The Aggressive Investor is open to significant risk for the potential of maximum returns in the Maverick AGGRESSIVE GROWTH portfolio.

Market Guidance:

  • Consensus Analyst Ratings— MarketBeat = Hold, TipRanks = Moderate Buy
  • 12 Wall Street analysts have offered 12-month price targets in the last 3 months. There are 8 Buy, 3 Hold, and 1 Sell. (from TipRanks)
  • Based on 12 Wall Street analysts offering 12-month price targets in the last 3 months, the average price target is $276.16 with a high forecast of $350.00 and a low forecast of $210.00. The average price target represents a +14.71% change from the last price of $240.75. (from TipRanks)
  • Dividend Yield: $1.30 per share paid quarterly to yield 2.08%.
  • Dividend growth for 15+ years. (from TipRanks)
  • Technical Sentiment (based on Technical Indicators and Moving Averages):
    • Investing.com = Daily (STRONG SELL) and Weekly (STRONG SELL)
    • TipRanks = Daily (SELL) and Weekly (NEUTRAL)

Value Line Guidance:

  • Company Financial Strength Rating:  A+
  • Share Price Safety, Market Timing, Technical Rank: 1=best. 5=worst
  • Share Price Safety:       2 of 5               
  • Market Timing:             1 of 5               
  • Technical Rank:            3 of 5               
  • Stock’s Price Stability:             70/100              
  • Price Growth Persistence:      75/100             
  • Earnings Predictability:          50/100             
  • Average Annual PE:                   15                                
  • Average Annual Sales Growth in the past 5 years:              +5.0% 
  • Average Annual Sales Growth for the next 5 years:            +9.0%
  • Average Annual Cash Flow Growth in the past 5 years:     +8.0%
  • Average Annual Cash Flow Growth for the next 5 years:    +11.5%
  • Average Annual Earnings Growth in the past 5 years:        +15.%
  • Average Annual Earnings Growth for the next 5 years:     +14.5%
  • Average Annual Dividend Growth in the past 5 years:       +7.5%
  • Average Annual Dividend Growth next 5 years:                   +5.0%
  • Average Annual Dividend Yield 3 to 5 years:                        +1.7%

Financial Performance

  • 10-year Average Annual Total Return: +14.16% (through Nov 3, 2023) (1st Quartile)
  • EPS
    • FY2021: $10.81
    • FY2022: $13.87
    • FY2023: e$20.51
    • FY2024: e$20.78
    • FY2025: e$21.79  (from Koyfin)
  • Average Annual PE: 15 (VL Quarterly Report)
  • PEG Ratio: 1.34 (FinViz)
  • Beta: 1.08 (FinViz)

Quarterly Reports Summaries (including Revenue, Cash Flow, Earnings, and Dividends):

Latest earnings report: IRVING, Texas, October 31, 2023

Caterpillar Inc. (NYSE: CAT) announced third-quarter 2023 sales and revenues of $16.8 billion, a 12% increase compared with $15.0 billion in the third quarter of 2022. The increase was primarily due to favorable price realization and higher sales volume.

The operating profit margin was 20.5% for the third quarter of 2023, compared with 16.2% for the third quarter of 2022. Adjusted operating profit margin was 20.8% for the third quarter of 2023, compared with 16.5% for the third quarter of 2022. Third-quarter 2023 profit per share was $5.45, compared with third-quarter 2022 per share profit of $3.87. Adjusted profit per share in the third quarter of 2023 was $5.52, compared with third-quarter 2022 adjusted profit per share of $3.95. Adjusted operating profit margin and adjusted profit per share for both quarters excluded restructuring costs. Please see a reconciliation of GAAP to non-GAAP financial measures in the appendix on page 12.

For the nine months ended September 30, 2023, the enterprise operating cash flow was $8.9 billion, and the company ended the third quarter with $6.5 billion of enterprise cash. In the quarter, the company paid dividends of $0.7 billion and repurchased $0.4 billion of Caterpillar common stock.

“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 ME&T free cash flow,” said Chairman and CEO Jim Umpleby. “We remain focused on supporting our customers’ success and executing our strategy for long-term profitable growth.”

A STUDY OF CATERPILLAR INC (NYSE: CAT) November 5, 2023

Strong Financial Performance:

  • Q4 2022 Report: Caterpillar experienced a favorable fourth quarter in 2022, with a more-than-expected 20% increase in sales to $16.597 billion. The company achieved this growth through a combination of price increases and higher sales volume, which offset the negative impact of currency fluctuations and elevated manufacturing costs.
  • Q1 2023 Report: Caterpillar continued its impressive performance in the first quarter of 2023, with a 17% increase in sales to $15.86 billion. The company benefited from strong price gains, higher volume, and lower manufacturing costs, resulting in a notable operating margin of 21.1%.
  • Q2 2023 Report: The second quarter of 2023 saw Caterpillar’s sales surge to $17.3 billion, surpassing expectations. The company experienced strong demand from various end markets, especially construction and mining. Dealers’ higher prices and inventory replenishment efforts contributed to the positive results, leading to an adjusted operating profit margin of around 21%.
  • Q3 2023 Report: Caterpillar’s third-quarter 2023 revenue of $16.8 billion, a 12% increase compared with $15.0 billion in the third quarter of 2022. The increase was primarily due to favorable price realization and higher sales volume.

Conclusion: Caterpillar’s financial performance is strong and consistent, demonstrating the company’s ability to navigate through market challenges. The company’s sustained sales and earnings growth, coupled with effective cost management and improved margins, indicate a positive outlook for its future prospects. However, the company continues to monitor potential market headwinds, such as fluctuations in specific regions and potential economic slowdowns, to ensure sustained growth and profitability. Investors’ sentiment has remained positive, reflecting confidence in Caterpillar’s long-term strategy and operational resilience.

Margin Improvement:

  • Q4 2022 Report: Caterpillar achieved an adjusted operating margin of 17.0% in the fourth quarter of 2022, a significant improvement compared to the 11.4% posted in the same period of the previous year. This improvement was attributed to effective management of manufacturing costs and favorable pricing dynamics.
  • Q1 2023 Report: The first quarter of 2023 witnessed a further enhancement of Caterpillar’s operating margin, reaching 21.1%. The company managed to keep manufacturing costs under control, contributing to the margin expansion.
  • Q2 2023 Report: Caterpillar continued its margin improvement trend, with an adjusted operating profit margin of approximately 21% in the second quarter. This was a substantial increase from the 14% margin recorded in the same period the previous year.
  • Q3 2023 Report: Caterpillar sustained its momentum, with the adjusted operating profit margin reaching 20.8%, showcasing continued improvement over the previous year’s performance.

Market Outlook and Concerns:

  • Q4 2022 Report: Caterpillar expressed optimism for 2023, expecting favorable prices to increase sales. However, the company anticipated a modest gain due to what was perceived as decent market demand. Concerns were raised about high freight and material costs, as well as a slow recovery in demand from China.
  • Q1 2023 Report: Caterpillar maintained a positive outlook for the year but highlighted the likelihood of a sequential slowdown in the latter part of 2023. The report also mentioned potential challenges from restocking efforts and the absence of favorable cost absorption in the first quarter.
  • Q2 2023 Report: The report acknowledged that while Caterpillar expected favorable results in the next quarter, there could be a sequential slowdown due to normalized inventory levels, potential softer business in China’s construction market, and a potential global economic slowdown.
  • Q3 2023 Report: Caterpillar’s positive market outlook continued, driven by the company’s sustained growth in sales and revenues. However, concerns regarding potential economic slowdown and market-specific challenges persisted.

Investor Sentiment:

  • Q4 2022 Report: Despite Caterpillar’s strong performance, investors reacted negatively to the earnings that fell slightly short of consensus expectations. The report also mentioned concerns about high freight and material costs impacting the EBITDA margin.
  • Q1 2023 Report: The report noted that sector weakness had recently weighed on Caterpillar’s share value, leading to a potentially favorable entry point for momentum accounts.
  • Q2 2023 Report: Caterpillar’s share value experienced a surge, up 22% since the May report, reaching a record high. The proprietary ranking system suggested that the stock would outperform in the next six to 12 months. However, the report cautioned investors about the stock’s current valuation and potential impact on long-term prospects.
  • Q3 2023 Report: Investor sentiment remained positive following the company’s robust performance in the third quarter, reflecting confidence in Caterpillar’s ability to sustain growth and profitability despite potential market challenges.

Geographic and Market Segment Performance:

  • Caterpillar’s geographic and market segment performance remained a key factor throughout the reports, mentioning strength in key categories such as Construction Industries, Resource Industries, and Energy & Transportation. The third-quarter results highlighted the company’s success in various segments and markets, contributing to its overall growth and profitability.

The key financial metrics from the last four Caterpillar financial reports (4Q2022, 1Q2023, 2Q2023, and 3Q2023):

  • Sales per Share (in USD):
    • 4Q2022: $120.40
    • 1Q2023: $123.30
    • 2Q2023: $128.55
    • 3Q2023: $134.50
  • Cash Flow per Share (in USD):
    • 4Q2022: $19.95
    • 1Q2023: $21.40
    • 2Q2023: $23.50
    • 3Q2023: $24.20
  • Earnings per Share (EPS) (in USD):
    • 4Q2022: $15.20
    • 1Q2023: $16.65
    • 2Q2023: $19.05
    • 3Q2023: $22.30
  • Dividends Declared per Share (in USD):
    • 4Q2022: $4.68
    • 1Q2023: $4.68
    • 2Q2023: $5.00
    • 3Q2023: $5.30
  • Capital Spending per Share (in USD):
    • 4Q2022: $4.85
    • 1Q2023: $4.85
    • 2Q2023: $4.95
    • 3Q2023: $5.10
  • Book Value per Share (in USD):
    • 4Q2022: $31.70
    • 1Q2023: $31.70
    • 2Q2023: $38.55
    • 3Q2023: $41.20
  • Common Shares Outstanding:
    • 4Q2022: 515.00 million shares
    • 1Q2023: 515.00 million shares
    • 2Q2023: 507.00 million shares
    • 3Q2023: 505.00 million shares
  • Operating Margin:
    • 4Q2022: 22.0%
    • 1Q2023: 22.5%
    • 2Q2023: 21.5%
    • 3Q2023: 20.5%
  • Net Profit Margin:
    • 4Q2022: 23.0%
    • 1Q2023: 23.0%
    • 2Q2023: 20.0%
    • 3Q2023: 21.0%
  • Return on Total Capital:
    • 4Q2022: 20.5%
    • 1Q2023: 23.5%
    • 2Q2023: 23.0%
    • 3Q2023: 24.0%
  • Return on Shareholder’s Equity:
    • 4Q2022: 32.5%
    • 1Q2023: 40.5%
    • 2Q2023: 36.5%
    • 3Q2023: 38.0%
  • Retained to Common Equity:
    • 4Q2022: 30.0%
    • 1Q2023: 28.0%
    • 2Q2023: 26.0%
    • 3Q2023: 25.0%
  • All Dividends to Net Profit:
    • 4Q2022: 28%
    • 1Q2023: 25%
    • 2Q2023: 26%
    • 3Q2023: 24%

These comparisons reveal several trends and changes over the past four quarters:

  1. Sales and Earnings Growth: Caterpillar’s sales and earnings per share have shown strong growth over the four quarters, indicating the company’s sustained performance and market demand.
  2. Cash Flow: The company’s cash flow per share has consistently increased, demonstrating Caterpillar’s strong cash generation capability and effective financial management.
  3. Dividends: Dividends declared per share have gradually increased, reflecting the company’s commitment to providing returns to its shareholders alongside its robust financial performance.
  4. Capital Spending: Capital spending per share has increased moderately over the quarters, reflecting the company’s investment in its operations and growth initiatives.
  5. Margins: While the operating margin has slightly declined, it remains healthy, indicating efficient cost management and sustainable profitability. The net profit margin slightly increased in the third quarter, suggesting improved operational efficiency and effective revenue management.
  6. Book Value: The book value per share has experienced significant growth over the quarters, reflecting the company’s increased asset base and strengthened financial position.
  7. Return on Equity and Total Capital: Both return on equity and return on total capital have shown consistent improvement, indicating Caterpillar’s effective utilization of resources and ability to generate profitable returns for its shareholders.
  8. Retained Earnings: The percentage of retained earnings to common equity has gradually declined over the quarters, potentially indicating increased investments or distributions to shareholders.
  9. Common Shares Outstanding: The number of outstanding shares has slightly decreased over the quarters, reflecting potential share repurchases or other corporate actions.
  10. Dividends to Net Profit: The percentage of all dividends to net profit has shown a downward trend, potentially indicating the company’s focus on retaining more earnings for future investments or expansion.

The 3-to-5-year Operational and Financial Outlook:

  • The 3-to-5-year outlook indicates continued growth in revenue and earnings.
  • The company’s long-run outlook is cautiously optimistic but is concerned about global economic headwinds.

Company SWOT Analysis

Internal Strategic Factors:

Strengths

  • Strong global brand recognition and market position.
  • Extensive and efficient distribution network.
  • Diversified portfolio across various industries.
  • Emphasis on innovation and research and development.
  • Robust financial services and customer support.
  • Committed approach to sustainability and environmental impact.
  • Successful automation of activities, resulting in quality and scalability.
  • Effective capital expenditure management and good returns.
  • High levels of customer satisfaction and a strong dealer community.
  • Reliable supplier base and highly skilled workforce.
  • Superior channel network and consistent dealer service worldwide.
  • Comprehensive product portfolio meeting various applications.
  • Successful acquisition of significant companies, contributing to revenue growth.
  • Large employee base of over 150,000, contributing to the company’s expertise and capabilities.

Weaknesses

  • Vulnerability to economic cycles impacting demand for its products.
  • Intense competition affects pricing power and market share.
  • Exposure to currency fluctuations leading to revenue and cost volatility.
  • Regulatory compliance risks and potential penalties.
  • Supply chain disruptions affect production and costs.
  • Reliance on dealer network performance for global sales and distribution.
  • Workforce challenges, including attracting and retaining skilled talent.
  • Market-specific concerns such as the European crisis, falling sales in Africa and the Middle East, and the decline in the US real estate housing market.
  • Product range gaps provide opportunities for competitors.
  • High attrition rate and increased workforce costs.
  • High days inventory impacts the company’s capital and growth.
  • There is a need for increased investment in new technologies and research and development to remain competitive in the industry.

External Strategic Factors:

Opportunities

  • Expansion into emerging markets with growing infrastructure needs.
  • Leveraging technological advancements for autonomous operation and data analytics.
  • Focus on renewable energy and sustainable product offerings.
  • Diversification through strategic partnerships and acquisitions.
  • Expansion of aftermarket services and customer support.
  • Investment in digitalization for connected equipment and remote monitoring solutions.
  • Focus on workforce development and training initiatives for skilled talent acquisition and retention.
  • Differential pricing strategies with the implementation of new technologies.
  • Entry into newly developing markets due to technological criteria and trade agreements.
  • Stable free cash flow, enabling investment in new technologies and product segments.
  • Adaptation to new trends in consumer behavior and the potential for new product categories.
  • Lower transportation costs lead to increased profitability or market share growth.
  • Utilization of new taxation policies to enhance profitability and operational efficiency.
  • Growth opportunities from higher construction and mining activities in emerging markets.
  • Expansion of the mining product range after the Bucyrus acquisition.
  • Potential avenues from future trends include natural gas-powered vehicles in the industry.

Threats

  • Economic downturns impact demand for heavy machinery and equipment.
  • Intense competition affects pricing power and market share.
  • Regulatory challenges lead to increased compliance costs and modifications.
  • Geopolitical tensions and trade conflicts disrupting global supply chains.
  • Fluctuations in commodity prices influence input costs and demand.
  • Currency fluctuations affect revenues, costs, and profitability.
  • Technological disruption and the risk of falling behind industry innovations.
  • Cybersecurity risks threatening the company’s digital operations and data.
  • Talent retention challenges, particularly in specialized areas and an aging workforce.
  • Increasing competition leads to downward pressure on profitability and sales.
  • Exposure to currency fluctuations and liability laws in different markets.
  • Impact of rising pay levels and inflation on the company’s profitability.
  • Competition from rivals with advanced technologies and production capabilities.
  • Risks associated with increasing trends towards isolationism in global markets.
  • Stiff competition from companies like Joy Global, especially in the Chinese market.
  • Challenges due to high inflation and construction slowdown in the U.S. and China.
  • Vulnerability of mining operations to material prices and political stability.

FinViz Snapshot:  https://finviz.com/screener.ashx?v=341&t=CAT

10-Year Historical Price Chart:

https://tvc-invdn-com.investing.com/data/tvc_85da2a10e936ff8b03fee6fb384a8bd7.png

Point & Figure Chart:

https://stockcharts.com/freecharts/pnf.php?c=CAT,PWTAWANRNO[PA][D][F1!3!!!2!20]

 

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