Image: Bigstock

Caterpillar Inc. (CAT Quick Quote CAT - Free Report) reported first-quarter 2020 adjusted earnings per share of $2.87, which beat the Zacks Consensus Estimate of $1.93 by a margin of 49%. The bottom line surged 74% from the prior-year quarter as all of its segments reported improved performances courtesy of higher demand in end markets. The company’s shares were up 2.6% in pre-market trading following the upbeat results.

Including one-time items, Caterpillar’s first-quarter earnings per share was $2.77, reflecting a growth of 40% from the prior-year quarter figure of $1.98.

Improving Demand Fuels Revenue Growth

The company’s first-quarter revenues of $11.9 billion surpassed the Zacks Consensus Estimate of $11.05 billion. The top line also indicated an improvement of 12% from the year-ago quarter. This upbeat performance was driven by higher sales volume aided by higher end-user demand and the impact from changes in dealer inventories. Notably, dealers increased their inventories by $700 million during the reported quarter compared to $100 million in the prior-year quarter, which marked the outbreak of the coronavirus pandemic.

Sales in the Asia Pacific impressed with year-over-year growth of 31% followed by Latin America, which witnessed an increase of 24% in sales. Sales in EAME were up 13% while in North America were flat compared with the year-ago quarter.

Caterpillar Inc. Price, Consensus and EPS Surprise

Caterpillar Inc. price-consensus-eps-surprise-chart | Caterpillar Inc. Quote

Margins Gain on Higher Sales Volume

In first-quarter 2021, cost of sales increased 10% year over year to $8 billion. Manufacturing costs were higher in the quarter owing to higher short-term incentive compensation expense, which were partially offset by favorable material costs and lower warranty expense. Gross profit rose 15% year over year to $3.87 billion primarily on the back of improved sales. Gross margin was 32.6% in the quarter under review compared with 31.7% in the prior-year quarter.

Selling, general and administrative (SG&A) expenses increased 10.5% to around $1.2 billion. Research and development (R&D) expenses went up 5% to $374 million from the prior-year quarter. Both SG&A and R&D expenses in the quarter were up year over year due to higher short-term incentive compensation expense, which was reinstated in 2021.

Adjusted operating profit in the quarter surged 30% year over year to $1.88 billion, reflecting increased volumes and higher profit from Financial Products. These gains were partially offset by higher SG&A and R&D expenses, unfavorable price realization, and rising manufacturing costs. The adjusted operating margin was 15.8% in the reported quarter, up 230 basis points from the prior-year quarter.

Segments Deliver Improved Performances

Machinery and Energy & Transportation (ME&T) sales rose 13% year over year to $11.2 billion in the quarter under review. Construction Industries sales were up 27% year over year to $5.4 billion owing to increased sales volumes reflecting improving end-user demand and the impact of changes in dealer inventories.

Sales at Resource Industries increased 6% year over year to around $2.2 billion on higher sales volume owing to changes in dealer inventories and higher end-user demand for equipment and aftermarket parts.  The favorable currency impact from the Australian dollar, was offset by unfavorable price realization. While the segment noted increased demand in mining, demand in heavy construction and quarry and aggregates were reportedly weak.

Sales of Energy & Transportation segment in the quarter were around $4.5 billion, reflecting growth of 4% from the prior-year quarter. Sales were up in Power Generation and Oil and Gas. However, lower sales in Transportation had a dampening effect.

The ME&T segment reported an operating profit of $1,664 million, which highlighted an increase of 24% year over year. The Energy & Transportation segment’s operating profit went up 11% year over year to $666 million as benefits from higher sales volume and favorable variable manufacturing costs were partially offset by higher SG&A/R&D expenses.

The Construction Industries segment witnessed a 62% surge in operating profit to $1 billion courtesy of higher volume. The Resource Industries segment’s operating profit increased 8% year over year to $328 million in the quarter under review. Gains from favorable manufacturing costs and higher sales volume were somewhat negated by unfavorable price realization and higher SG&A/R&D expenses.

Financial Products’ revenues climbed 7% to $761 million from the prior-year quarter. Financial Products' profits were $244 million in the reported quarter — a whopping improvement of 132% year over year. This was due to a favorable impact from equity securities in Insurance Services and lower provision for credit losses at Cat Financial, partially offset by an increase in SG&A expenses.

Strong Cash Position

At the end of the first quarter, operating cash flow was $1.9 billion compared with $1.13 billion in the prior-year quarter. Caterpillar ended the first quarter with cash and short-term investments of $11.3 billion compared with $9.3 billion as of 2020 end.

Price Performance

Over the past year, Caterpillar stock has gained 93.5%, compared with the industry’s rally of 94.3%.

Zacks Rank & Other Stocks to Consider

Caterpillar currently carries a Zacks Rank #2 (Buy). 

Some other top-ranked stocks in the Industrial Products sector include Astec Industries, Inc. (ASTE Quick Quote ASTE - Free Report), Dover Corporation (DOV Quick Quote DOV - Free Report), and Pentair plc (PNR Quick Quote PNR - Free Report), each carrying a Zacks Rank of 2, at present.

Astec Industries has an estimated earnings growth rate of 14.3% for the ongoing year. The company’s shares have rallied 92% in the past year.

Dover has a projected earnings growth rate of 21.8% for 2021. Over the past year, the company’s shares have gained 54%.

Pentair has an expected earnings growth rate of 11.6% for 2021. The stock has surged 82% in a year’s time.