Caterpillar Earnings Confirm Last Quarter Was Not the ‘High-Water Mark’

Another quarter, another earnings beat, and another step forward for the earth-moving equipment maker

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In retrospect, Caterpillar (NYSE:CAT) may have (inadvertently) sandbagged itself a quarter ago when CFO Bradley Halverson suggested the first quarter’s solid operating margins represented the year’s “high-water mark.” CAT stock was up firmly in the wake of Monday’s morning’s Q2 earnings release. They were not only better than expected, but pointed to better days ahead.

In Halverson’s defense, shortly after making the comment he clarified that his wording wasn’t meant as a caution that things couldn’t get any better. For the record, the company’s Q1 operating margins were better than Q2’s, but both were still plenty respectable.

Either way, with Q2 numbers in hand, owners of CAT stock can breathe a little easier than they could as of the end of last week.

Caterpillar Earnings Recap

For the three month stretch ending in June, Caterpillar turned $14.0 billion worth of revenue into a per-share profit of $2.97. Both were better than expected, and both were well up from year-ago levels. Analysts were only modeling a bottom line of $2.75 per share of CAT stock and a top line of $13.89 billion. For the second quarter of 2017, the company earned $1.49 per share on sales of $11.3 billion.

CEO Jim Umpleby commented on the Q2 results “Caterpillar delivered record second-quarter profit per share. Our team is doing a great job executing our strategy for profitable growth, focusing on operational excellence, expanded offerings and services.”

The earnings-per-share were given a bit of a boost by buybacks. Caterpillar repurchased $750 million worth of CAT stock during Q2, following $500 million worth of repurchases during the Q1.

Umpleby’s point is well taken all the same though. The environment is better now than it’s been in a long time, with commodity prices remaining firm and a strong global economy ramping up new need for heavy equipment. Last quarter’s initial estimate for GDP growth of 4.1% is one of the best readings in several quarters.

Drilling Down

The company’s resource (mining) industry division was the brightest of the bright spots last quarter, with revenue up 38% year-over-year. The segment’s profits ramped up from $99 million to $411 million —  16.3% of the unit’s top line of $2.5 billion.

Construction sales were up a healthy 24% on their own though, while energy and transportation revenue grew 20%. Energy and transportation’s profit of $1.0 billion was up 46%, and construction’s profit grew 28% to $1.15 billion. Construction revenue rolled in at just under $5.0 billion, and energy and transportation sales were just shy of $4.8 billion.

Looking Ahead for CAT Stock

With two consecutively solid quarters on the books — against a backdrop of several quarters of clear growth — Caterpillar upped its full year outlook. It’s now looking for a 2018 profit of between $11.00 and $12.00 per share of CAT stock, up from a previous range of guidance between $10.25 and $11.25 per share. The analyst consensus for 2018 had been $10.76 per share.

The improved outlook factors in the extra $100 million to $200 million the recently-imposed import tariffs will cost Caterpillar during the second half of the year… assuming they’re not eliminated.

Even so, the company suggested it would be able to at least partially offset those added costs by price increases slated for later in the year.

Further bolstering the bottom line will be continued stock repurchases.

Of the $10.0 billion in funding approved in 2014 for repurchases of CAT stock, $4.2 billion of that budget remains unused. The company said it intends to buy back its shares in the second half of 2018 at a rate similar to its buying pace seen in the first half of the year. And just this month the Board of Directors authorized another $10 billion worth of stock repurchases that will become effective at the beginning of next year.

As of the latest look, analysts are looking for a bottom line of $12.06 per share of CAT stock next year, up 11% from this year’s projection, while sales are expected to improve 8.1%, from 2018’s outlook of $53.6 billion to $58.0 billion in 2019.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

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