Construction equipment company Caterpillar (NYSE:CAT) missed Wall Street’s revenue expectations in Q4 CY2024, with sales falling 5% year on year to $16.22 billion. Its non-GAAP profit of $5.14 per share was 2.2% above analysts’ consensus estimates.
Revenue: $16.22 billion vs analyst estimates of $16.55 billion (5% year-on-year decline, 2% miss)
Adjusted EPS: $5.14 vs analyst estimates of $5.03 (2.2% beat)
Adjusted EBITDA: $3.48 billion vs analyst estimates of $3.59 billion (21.5% margin, 3.2% miss)
Operating Margin: 18%, in line with the same quarter last year
Free Cash Flow Margin: 9%, down from 19.9% in the same quarter last year
Market Capitalization: $189.9 billion
"I'm proud of our global team's strong performance in 2024 as they delivered record adjusted profit per share and strong ME&T free cash flow," said Caterpillar Chairman and CEO Jim Umpleby.
Company Overview
With its iconic yellow machinery working on construction sites, Caterpillar (NYSE:CAT) manufactures construction equipment like bulldozers, excavators, and parts and maintenance services.
Construction Machinery
Automation that increases efficiencies and connected equipment that collects analyzable data have been trending, creating new sales opportunities for construction machinery companies. On the other hand, construction machinery companies are at the whim of economic cycles. Interest rates, for example, can greatly impact the commercial and residential construction that drives demand for these companies’ offerings.
Sales Growth
A company’s long-term performance is an indicator of its overall quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for years. Over the last five years, Caterpillar grew its sales at a sluggish 3.8% compounded annual growth rate. This fell short of our benchmark for the industrials sector, but there are still things to like about Caterpillar.
Caterpillar Quarterly Revenue
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Caterpillar’s annualized revenue growth of 4.4% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.
Caterpillar Year-On-Year Revenue Growth
This quarter, Caterpillar missed Wall Street’s estimates and reported a rather uninspiring 5% year-on-year revenue decline, generating $16.22 billion of revenue.
Looking ahead, sell-side analysts expect revenue to grow 1.9% over the next 12 months, a slight deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.
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Operating Margin
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Caterpillar has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 16%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.
Analyzing the trend in its profitability, Caterpillar’s operating margin rose by 9.3 percentage points over the last five years, showing its efficiency has meaningfully improved.
This quarter, Caterpillar generated an operating profit margin of 18%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.
Earnings Per Share
We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.
Caterpillar’s EPS grew at a remarkable 14% compounded annual growth rate over the last five years, higher than its 3.8% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.
Caterpillar Trailing 12-Month EPS (Non-GAAP)
We can take a deeper look into Caterpillar’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Caterpillar’s operating margin was flat this quarter but expanded by 9.3 percentage points over the last five years. On top of that, its share count shrank by 13.2%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Caterpillar Diluted Shares Outstanding
Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.
For Caterpillar, its two-year annual EPS growth of 25.7% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.
In Q4, Caterpillar reported EPS at $5.14, down from $5.23 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 2.2%. Over the next 12 months, Wall Street expects Caterpillar’s full-year EPS of $21.90 to stay about the same.
Key Takeaways from Caterpillar’s Q4 Results
We struggled to find many resounding positives in these results. Its revenue missed, and its EBITDA also fell short of Wall Street’s estimates. Management said that "lower sales volume was primarily driven by lower sales of equipment to end users." Overall, this quarter could have been better. The stock traded down 4.4% to $376.12 immediately following the results.
Caterpillar’s latest earnings report disappointed. One quarter doesn’t define a company’s quality, so let’s explore whether the stock is a buy at the current price. We think that the latest quarter is just one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.
