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 saw a 4% drop in third-quarter revenue to $16.1bn, driven by lower sales volumes offset to a small extent by better pricing. In the three primary segments, sales were lower in Construction Industries and Resource Industries and higher in Energy & Transportation.

Underlying operating profit fell 8% to £3.2bn and followed a similar trend to revenue, with volume declines the key driver. The core construction businesses generated free cash flow of $2.7bn, down from $2.9bn a year ago.

Full-year revenue is expected to be slightly lower than previously thought, profit expectations remain unchanged, and core free cash flow now expected at the top of the previous $7.5-10bn range.

The shares fell 3.2% in pre-market trading.

Our view

After a knockout 2023 things have been easing for Caterpillar. Performance is being supported by good pricing, but weak end demand is causing volumes to wobble. Given the decent year to date performance, that’s seen Caterpillar come under pressure off the back of results.

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.

Despite some softening, we see longer-term 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 and Caterpillars products help make that a reality.

The AI wave is touching everyone and with huge investment in data centre buildouts, Caterpillar looks set to benefit. It’s increasing investment in some of its products that help support the buildout which we think is a smart move.

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 $9.1bn delivered over the first three quarters of the year through dividends and buybacks – though no 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.

Environmental, social and governance risk

General Industrial companies are medium risk in terms of ESG but can trend up to the higher end of the spectrum depending on subindustry. The primary risks can include labour relations, emissions (either product or production-based), business ethics and product governance. Other concerns are waste and health & safety.

According to Sustainalytics, Caterpillar’s management of material ESG issues is average.

Caterpillar prohibits bribery, requiring employees to complete yearly code of conduct training. While its audit committee oversees compliance, the company recently faced a U.S. investigation into tax and export practices, resulting in a settlement with the IRS in late 2022 without penalties. Caterpillar highlights its efforts in talent recruitment and development but lacks disclosures on employee turnover and the scope of its product quality certifications across manufacturing operations.

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