Caterpillar Inc (CAT) Com Stk USD1 (CDI)

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Caterpillar reported second-quarter revenue of $16.7bn, down 4% but in line with expectations. A drop in sale volumes was partially offset by higher selling prices. By division, Construction and Resource saw sales drop, while Energy & Transportation delivered growth.

Underlying operating profit was flat at $3.7bn, while margins rose from 21.3% to 22.4%. The core construction businesses generated free cash flow of $2.5bn, down from $2.6bn a year ago.

Third quarter revenue is expected to be lower than last year, with underlying operating margin at a similar level. Full-year free cash flow is expected between $7.5-10bn (previously $5-10bn).

The shares were up 4.2% in pre-market trading.

Our view

After a knockout 2023 things have been easing for Caterpillar. Still, second-quarter results were good, and performance continues to be supported by strong pricing power. There is some volume weakness creeping in, but we still see enough long-term drivers to make this an attractive name from here.

For nearly a century, the company's built mission-critical heavy machinery, which has led to its position as one of the world's most valuable brands. Three key pillars underpin the business model; Construction Industries, Resource Industries and Energy & Transportation.

We can find positives in all three. Infrastructure spend has tailwinds from government-related investment in the US. For mining equipment, commodity prices have come down, but remain high enough for continued investment. Longer term, we see increased demand for materials that help support the global energy transition. It's Caterpillar's product range that can support that. There are also innovative solutions brought to the table with autonomous mining vehicles which have so far shown to increase productivity by 30%.

In Energy & Transportation, demand for oil & gas related products could well be peaking. It's in the more environmentally friendly offerings that we see longer-term potential, innovations like green hydrogen generators can help end customers meet their climate-related objectives.

Running across all three segments is the services offering, where Caterpillar offers repairs and upgrades throughout its products' life cycles. This helps support revenue streams and is an offering that's gone from strength to strength.

Strong free cash flow guidance is welcome news and helps to ease the pressures that the heavy debt load brings. As a mature business, it can stomach a higher debt load, and levels relative to profits have been steady over time. That cash flow also supports shareholder returns, with $7.6bn delivered over the first half through dividends and buybacks – though no future returns are guaranteed.

Caterpillar offers indirect exposure to a range of end markets. Looking further out we remain confident in the longer-term industry growth drivers, and like Caterpillar as a business leader. We do see some uncertainty in the near term as the level of demand finds a level to settle at.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Previous Caterpillar Inc updates