The industrial company is doing a great job with its pricing strategy.
Shares of Caterpillar (CAT 3.89%) were up 4.5% by 11 a.m. on Tuesday. The move comes after the company’s mixed earnings report. Sales declined, but Caterpillar is wringing profitability out of its operations, and investors have reason to believe that the company has structurally higher margins now.
Caterpillar’s mixed results
The company’s end markets are slowing, and Wall Street expects its full-year revenue to decline by 1.5%. Moreover, Caterpillar slightly lowered its sales expectations. Management now expects slightly lower sales in 2024 than in 2023, compared to previous guidance for revenue broadly similar to 2023.
However, management said its 2024 adjusted operating profit margin would be above the high end of its target range, and that its full-year adjusted operating profit would be higher than previously anticipated.
Demonstrating its pricing power
The better margin and profit outlook (though revenue will be worse than previously expected) is mainly due to Caterpillar’s excellent pricing realization. It breaks out its sales growth into various components, including sales volume and price realization.
The bad news is that Caterpillar hasn’t reported growth in sales from sales volume since the third quarter of 2023.The good news is that price realization (incremental revenue realized by increasing the price of the same product) continues to offset the reduction in sales volume.
Image source: Getty Images.
Moreover, since price realization dropped into profits, Caterpillar’s margins and profits improved. For example, in the second quarter, a sales volume decline led to a $431 million drop in operating profit, but price realization led to a $578 million increase. When adjusting for currency movements and restructuring costs, operating profit rose by 1.8% rather than the 5% decline reported.
That’s why Caterpillar’s stock found favor today.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.