Construction equipment company Caterpillar (NYSE:CAT) reported results in line with analysts' expectations in Q2 CY2024, with revenue down 3.6% year on year to $16.69 billion. It made a non-GAAP profit of $5.99 per share, improving from its profit of $5.55 per share in the same quarter last year.
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Caterpillar (CAT) Q2 CY2024 Highlights:
- Revenue: $16.69 billion vs analyst estimates of $16.67 billion (small beat)
- EPS (non-GAAP): $5.99 vs analyst estimates of $5.54 (8.1% beat)
- Gross Margin (GAAP): 39.2%, up from 32% in the same quarter last year
- Adjusted EBITDA Margin: 24%, in line with the same quarter last year
- Free Cash Flow of $2.11 billion, up 39.3% from the previous quarter
- Market Capitalization: $154.9 billion
"I'd like to thank our team for delivering another strong quarter, including higher adjusted operating profit margin, record adjusted profit per share and robust ME&T free cash flow," said Chairman and CEO Jim Umpleby.
With its iconic yellow machinery working on construction sites, Caterpillar (NYSE:CAT) manufactures construction equipment like bulldozers, excavators, and parts and maintenance services.
Construction Machinery
Automation that increases efficiencies and connected equipment that collects analyzable data have been trending, creating new sales opportunities for construction machinery companies. On the other hand, construction machinery companies are at the whim of economic cycles. Interest rates, for example, can greatly impact the commercial and residential construction that drives demand for these companies’ offerings.
Sales Growth
A company's long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Unfortunately, Caterpillar's 3.5% annualized revenue growth over the last five years was sluggish. This shows it failed to expand in any major way and is a rough starting point for our analysis. 
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Caterpillar's annualized revenue growth of 10.8% over the last two years is above its five-year trend, suggesting its demand recently accelerated.
This quarter, Caterpillar reported a rather uninspiring 3.6% year-on-year revenue decline to $16.69 billion of revenue, in line with Wall Street's estimates. Looking ahead, Wall Street expects revenue to remain flat over the next 12 months.
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Operating Margin
Caterpillar has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 15.6%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it's a show of well-managed operations if they're high when gross margins are low.
Looking at the trend in its profitability, Caterpillar's annual operating margin rose by 7.4 percentage points over the last five years, showing its efficiency has meaningfully improved.
In Q2, Caterpillar generated an operating profit margin of 20.9%, in line with the same quarter last year. This indicates the company's cost structure has recently been stable.
EPS
Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Caterpillar's EPS grew at a spectacular 14.8% compounded annual growth rate over the last five years, higher than its 3.5% annualized revenue growth. This tells us the company became more profitable as it expanded.
We can take a deeper look into Caterpillar's earnings quality to better understand the drivers of its performance. As we mentioned earlier, Caterpillar's operating margin was flat this quarter but expanded by 7.4 percentage points over the last five years. On top of that, its share count shrank by 14.6%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth. 
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For Caterpillar, its two-year annual EPS growth of 40% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.
In Q2, Caterpillar reported EPS at $5.99, up from $5.55 in the same quarter last year. This print beat analysts' estimates by 8.1%. Over the next 12 months, Wall Street expects Caterpillar to perform poorly. Analysts are projecting its EPS of $22.34 in the last year to shrink by 2% to $21.89.
Key Takeaways from Caterpillar's Q2 Results
It was good to see Caterpillar beat analysts' revenue and EPS expectations this quarter. Overall, this quarter seemed fairly positive and shareholders should feel optimistic. The stock traded up 6.4% to $337.01 immediately after reporting.
So should you invest in Caterpillar right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.