Caterpillar Earnings: Strong Demand Lifts Second-Quarter Performance

Solid demand and improving dealer inventories led Caterpillar CAT to post strong second-quarter earnings. The company’s stock was up nearly 9% in intraday trading, as Caterpillar outperformed consensus sales and earnings per share estimates for the quarter. The strong quarter pushed us to raise our fair value by 7% to $223. Our fair value raise was mostly attributable to our stronger near-term expectations for both sales and operating margins. We expect Caterpillar’s top line to grow by 15% in 2023, while operating margins expand by nearly 250 basis points.

The company earned strong marks in each of its three segments. In construction, the same themes we’ve highlighted in past quarters were at play. For example, continued infrastructure investment by construction contractors. Sales in the construction segment increased 19% year on year to $7.1 billion.

Caterpillar benefitted from improving dealer inventories in the quarter. Growth in construction inventories was supported by strong end user demand. Management highlighted that construction inventories made up approximately 60% of overall inventories, with the balance coming from the resources segment and energy and transportation business. Keep in mind that seasonality pushes many dealers to restock construction products in the first half of the year. Therefore, the back half of the year may see some pressure, given the higher availability of excavators in the market. We like how dealer inventories are tracking overall and we continue to believe increased U.S. infrastructure spending will be a catalyst to dealer restocking in the years to come.

Even after our fair value estimate raise, we still view shares as overvalued. The stock trades approximately 29% above our $223 fair value estimate. We think the market is already baking in the infrastructure story into Caterpillar’s stock. We also give the company credit for coming infrastructure spending, but we’re taking a more measured approach to midcycle estimates.