Caterpillar (CAT) Heads Lower As Ongoing Supply Chain Constraints Hindered Sales Growth In Q2
3:08 pm Tuesday, August 02nd, 2022
Heavy machinery manufacturer Caterpillar (CAT) struggled with supply chain constraints in Q2, causing sales to continue to be left on the table, as component shortages resulted in production delays, a recurring issue throughout the past couple of years. With CAT missing out on potential revenue, it missed analyst expectations in the quarter, growing the figure just 10.5% yr/yr to $14.25 bln. However, outside of the sales miss, CAT’s Q2 results were mostly positive.
For one, demand remained strong in Q2, echoing recent comments from companies operating in the industrial sector, like Nucor (NUE), Steel Dynamics (STLD), and AGCO (AGCO).
CAT may also be facing unabated inflationary pressures. However, the good news is that price realization in Q2 more than offset manufacturing cost spikes, which took place earlier than CAT initially expected. Still, operating margins weakened by 30 bps yr/yr to 13.6%, driven by lower-than-expected volume and unfavorable mix.
It is worth noting that despite the slight margin contraction in Q2, CAT is confident it will achieve its Investor Day target of 10-13% margins at a $39 bln sales level and 18-21% margins at a $66 bln sales level. Both targets represent a 300-600 bp improvement from past margins at each sales level.
Further good news is that despite falling margins, CAT still exceeded analysts’ earnings estimates, extending its string of double-digit beats to nine straight quarters, growing adjusted EPS 22% yr/yr to $3.18. Orders also remained solid in the quarter, while CAT’s backlog jumped by roughly $2.0 bln.
However, on the flip side, CAT’s Resource Industries segment is expected to continue seeing robust demand as commodity prices remain supportive of investment despite recent moderation. Additionally, in CAT’s second-largest segment, Energy & Transportation, momentum will likely improve throughout the year, with strong order rates in most applications.
Overall, CAT’s Q2 results are a story of steady demand hindered by persistent supply chain hiccups. With similar supply chain woes from last quarter plaguing Q2, investors remain frustrated, sending shares lower, despite otherwise solid numbers and commentary.
Nevertheless, we believe today’s pullback acts as a good entry point as the back half of the year is shaping up to be significantly better than the first half. CAT is optimistic that volume and price realization will improve over the next two quarters, leading to yr/yr and sequential sales growth as well as expanding operating margins. Lastly, CAT’s numbers paint a good picture of what to expect from peers Terex (TEX) and Deere (DE), which report Q2 earnings on August 2 and 19, respectively.
