A fourth-quarter and full-year earnings beat justify why Caterpillar Inc. (NYSE:CAT) is trading near all-time highs. Coming off a challenging business environment, owing to COVID-19 shocks, the company was still able to beat analysts’ estimates affirming things might not be as bad as Wall Street had initially feared.
Strong Operational Performance
Investors have continued to push the stock up the charts on growing bets on widespread economic recovery expected to fuel demand for equipment for heavy construction projects.
Caterpillar brought in adjusted fourth-quarter earnings of $2.12 a share higher than $1.45 expected by Wall Street. Revenue fell 15% to $11.23 billion from $13.1 billion the same period last year but still beat consensus estimates of $11.18 billion.
The company attributed the earnings to strong operational performance, and a lower tax rate as a higher percentage of the profits came from Asia-Pacific Europe and Africa. However, sales were down in all the primary segments with resource industries reporting a 9% drop and construction industries a 10% drop.
For the full year, the company recorded adjusted net earnings per share of $6.56 a share nearly half $11.40 reported in 2019. Revenue came in at $41.7 billion down 22% year over year. The decline was mostly fuelled by lower end-user demand as well as dealers reducing inventories by $2.9 billion. Operating margins shrunk to 10.9% as a result of 15.4%.
Improving Fundamentals
In the fourth quarter, sales volumes improved significantly compared to the third quarter. Caterpillar Chief Financial Officer Andrew Bonfield expects the sales volume growth to gather pace in 2021 as economies worldwide bounced back from COVID-19 slowdowns.
In the long term, Caterpillar is to focus on profitable growth areas mostly made up of investments in the services connectivity and development of new products. With the global economy expected to grow by 5.5% in the January quarter, Caterpillar remains well-positioned to register an uptick in business activity.
Caterpillar has been on a fine run in recent months coming off its best quarter in three years. A bet on improving demand for machinery used in construction and infrastructure is one of the catalysts fuelling the stock’s price action.