CAT Just Landed On Its Feet With An Across-The-Board Q3 Beat

Reviewing Caterpillar Inc. CAT's third-quarter results, Stifel said the company reported another solid quarter, with results exceeding expectations across all metrics.

The manufacturer has successfully navigated challenging conditions over the past four-plus years, said analyst Stanley Elliott. 

"With [the] market finally underway, investors saw a glimpse of the earnings power inherent in this new, leaner, profit-focused model," Elliott said. (See Elliott's track record here.) 

The firm maintained a Hold on Caterpillar but raised its price target from $125 to $145 based on revised estimates.

After rallying 4.98 percent to $138.24 on Tuesday in reaction to quarterly results, Caterpillar shares are off down slightly Wednesday. 

Sales Volume Drives Earnings Beat

Third-quarter adjusted earnings of $1.95 were more than doubled from a year ago and exceeded the consensus of $1.27 and Elliott's estimate of $1.18. The upside came from higher sales volume across all regions and favorable price realization, with sales growth the highest in North America, Elliott said. 

Restructuring adjustments added $0.18 to Caterpillar's EPS versus $0.37 in the second quarter of 2017, according to Stifel. 

Top-line Outperforms On Dealer Inventory Changes

Caterpillar's revenues of $11.4 billion, a 25 percent increase, were ahead of Elliott's estimate of $10.38 billion and the consensus of $10.69 billion, with volumes rising 20 percent. The analyst attributed roughly half of the volume increase to favorable changes in dealer inventory levels.

While noting that dealer inventories saw a $200 million build compared to a $700 million draw down one year ago, Elliott said the increase is due to the absence of inventory reductions that occurred throughout 2016. 

Solid Order Backlog And Other Metrics

Caterpillar's order backlog is up $600 million from the previous quarter and totals $15.4 billion, for a book-to-bill ratio of 1.06x, Elliott said. The increase in backlog was due to increases in construction and resource backlogs and was partly offset by decreases in energy and transportation, the analyst said. 

Operating profit rose by more than $1 billion; consolidated EBIT totaled $1.577 billion and margins were 13.8 percent, a notable improvement from 5.3 percent in the third quarter of 2016, Elliott said. Incremental margins were at an impressive 48.6 percent, as improving volumes and price — primarily in construction — helped leverage a stable cost environment.

Higher Estimates

Stifel increased its 2017 EPS estimate from $5.07 to $6.25, reflecting the upside in the quarter and an improved fourth-quarter outlook. Citing higher revenues and margin assumptions, Stifel also raised its 2018 earnings per share estimate from $6.78 to $7.14.

The firm also increased its 2018 revenue estimate from $47.1 billion to $48.9 billion.

"Given how far many of Caterpillar's volumes have fallen from prior peaks, we expect this strong earnings flow through will continue through 2018, if not longer," Elliott said. 

"We continue to expect momentum in Caterpillar's business well into next year."

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Photo courtesy of Caterpillar.