What To Expect From Caterpillar’s Q2?

Caterpillar (NYSE: CAT) will report its Q2 2024 results on Tuesday, August 6. We expect the company’s revenues to come in at $16.8 billion and adjusted earnings of $5.56 per share, both slightly above the consensus estimates. The company should benefit from continued price improvements. However, dealer inventory levels may remain soft in Q2. Although we expect Caterpillar to post Q2 results slightly ahead of the street estimates, we believe its stock is fully valued at its current levels of around $330. Our interactive dashboard analysis of Caterpillar’s Earnings Preview has more details on the company’s revenues and earnings for the quarter. So, what are some of the trends that are likely to drive Caterpillar’s results?

Firstly, let us look at its stock performance in recent years. CAT stock has seen strong gains of 95% from levels of $170 in early January 2021 to around $330 now, vs. an increase of about 45% for the S&P 500 over this period. CAT is one of a handful of stocks that have increased their value in each of the last 3 years, but that still wasn’t enough for it to consistently beat the market. Returns for the stock were 16% in 2021, 19% in 2022, and 26% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that CAT underperformed the S&P in 2021.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for other heavyweights in the Industrials sector, including RTX and UNP, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CAT face a similar situation as it did in 2021 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, CAT stock looks appropriately priced. We estimate Caterpillar’s valuation to be $334 per share, aligning with its current market price. Our forecast is based on a little over 16x P/E multiple for CAT and expected earnings of $21.49 on a per-share and adjusted basis for the full year 2024. The 16x P/E multiple aligns with the average value over the last five years.

Looking at the previous quarter, Caterpillar’s revenue of $15.8 billion in Q1 was down 0.4% y-o-y. Looking at segments, the Construction Industries revenue was down 5%, Resource Industries sales were down 7%, while Energy & Transportation revenue was up 7%. Caterpillar saw its adjusted operating margin expand by 110 bps to 22.2% in Q1’24. The company’s bottom line stood at $5.60, compared to $4.91 in the prior-year quarter.

Coming to the latest quarter, although an improvement in pricing should help Caterpillar, a softer dealer inventory level is likely to weigh on the overall sales growth. We don’t expect any changes in the operating margin. Overall, 2024 is expected to be a year of tepid growth for Caterpillar and unless the company surprises with an earnings beat, better margin, or guidance, we don’t expect any significant growth in its stock in the near term.

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