Despite an unwarranted share slide, industrial powerhouse Caterpillar delivers a solid Q4

Published Tue, Jan 31 20232:35 PM ESTUpdated Wed, Mar 8 20231:59 PM EST

Caterpillar (CAT) reported solid fourth-quarter results Tuesday, demonstrating robust business fundamentals and steady demand for the construction-and-mining equipment made by the Club's newest holding . Revenue jumped 20.3% year-over-year, to $16.6 billion, beating analysts' expectations for $16.04 billion, according to estimates compiled by Refinitiv. If not for supply chain challenges, the topline result would have been even higher. Adjusted earnings-per-share (EPS) surged 43.5% annually, to $3.86 a share, missing the $4.02 per share forecasted by analysts. With its fourth-quarter results, Caterpillar achieved full-year 2022 earnings of $13.84 per share, an all-time record. Excluded from the adjusted earnings figure was a one-time goodwill impairment charge, restructuring costs and pension adjustments, all of which negatively impacted reported earnings by $1.07 a share. Shares of Caterpillar tumbled on the EPS miss, the result of a 41 cent-per-share negative impact due to a weakening U.S. dollar — an impact that had not been accounted for in analysts' initial estimates. The development prompted some data sources, including Refinitiv, to subsequently revise their estimates accordingly, meaning Caterpillar may have ultimately delivered a bottom-line beat. Caterpillar stock was trading down roughly 3.65%, at $251.95 a share, in midday trading Tuesday. Bottom line Regardless of whether EPS exceeded expectations or not — currency fluctuations are ultimately out of the company's control — Caterpillar delivered strong quarterly results. The sales beat came on the back of higher volumes and increased price realization, which was partially offset by currency dynamics. Moreover, breaking the top line down, consolidated sales growth is attributable to solid double-digit growth in all three primary operating segments. Supply chain improvements supported better-than-expected shipping results, most notably in the construction industries segment. An improvement in the supply chain also allowed for a boost in inventory levels, helping sales in North America, a region that had been heavily constrained. Furthermore, despite an increase in manufacturing costs that reflected, in part, higher material costs, management was able to achieve significant adjusted operating margin expansion, resulting in a quarterly record for the company. That's a development attributable to management's deft navigation through a challenging economic environment. As a result, Tuesday's unwarranted stock decline represents a buying opportunity . Underlying business fundamentals remain strong, end market demand is supportive of future sales and earnings growth and management reaffirmed their intention to return "substantially" all free cash flow from Caterpillar's machinery, energy and transportation operations to shareholders over time through dividends and share buybacks. That's in line with our mantra of owning companies that do things, make stuff, and generate real profits and cash flow that will be returned to investors. Outlook Looking to the current quarter, management expects adjusted operating profit margins to be "flattish to down," compared with the fourth quarter, roughly in line with Wall Street's expectations. As for the full year, management said sustained demand across all operating segments should result in both top- and bottom-line growth. Operating profit is also expected to rise for the full year, compared with 2022. Caterpillar's backlog grew by $400 million during the fourth quarter, bringing the total backlog to $30.4 billion at the end of 2022, which should further support growth in 2023. Management said it expects to achieve free cash flow for Caterpillar's machinery, energy and transportation operations in a range of $4 billion to $8 billion for the full year. Longer-term, management predicted reaching $28 billion in services sales by 2026, up from the $22 billion generated in 2022. During the earnings conference call with investors Tuesday, management commented on the various end markets in which Caterpillar operates: Construction industries: Management sees "positive momentum" in North America and expects "nonresidential construction in North America to grow due to the positive impact of government-related infrastructure investments, healthy backlogs and rental replenishment." However, though it remains at "a healthy level," the company expects residential construction — which accounts for about 25% of the unit's total revenues — to continue to moderate as a result of tightening financial conditions. Excluding China, management expects growth in the Asia/Pacific region "due to public infrastructure spending and supportive commodity prices." Resources industries: The company expects "healthy mining demand to continue as commodity prices remain above investment thresholds." Heavy construction is expected to see continued growth thanks to both infrastructure- and major nonresidential construction projects. Energy & transportation: Management predicts "sales growth due to strong order rates in most applications," citing "strength in demand in order intakes for the year." Cash flow and shareholder returns During the fourth quarter, Caterpillar's machinery, energy and transportation operations, excluding financial products, generated free cash flow of $3 billion and returned $1.5 billion to shareholders through share repurchases (about $900 million) and dividends (about $600 million). Caterpillar generated full-year free cash flow of $5.8 billion and returned a total of $6.7 billion to shareholders via share repurchases and dividends. Caterpillar is a so-called dividend aristocrat that has raised its dividend payout for 29 consecutive years. (Jim Cramer's Charitable Trust is long CAT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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Caterpillar excavators are displayed for sale at the Whayne Supply Co. dealership in Louisville, Kentucky, Jan. 27, 2020.

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