Caterpillar beats profit estimates as strong pricing cushions easing demand

By Shivansh Tiwary and Abhinav Parmar

(Reuters) - Caterpillar beat Wall Street estimates for second-quarter profit on Tuesday, as higher prices and easing manufacturing costs countered moderating demand for the company's heavy equipment across its major markets.

Shares of the company, known for its ubiquitous yellow excavators, rose 3% in early trading as it projected annual adjusted operating profit to be higher than its previous forecast. Peer Deere, set to report next week, rose 2%.

"Margin exceeded our expectations, primarily due to lower-than-expected manufacturing costs and slightly better-than-expected price," CEO Jim Umpleby said on an earnings call.

Caterpillar, which makes machinery used in the construction, mining and oil and gas industries, reported a favorable price realization of $578 million in the quarter.

"Caterpillar's pricing strength will continue to hold a steady base for their profit forecasts, but softening order volume compared to 2023 highlights uncertainty in markets outside of the U.S., particularly in China," Third Bridge analyst Ryan Keeney said.

Still, the company warned of prices moderating.

"While we anticipate some favorability in manufacturing costs ..., we do expect slightly lower volumes and a slight headwind from price in the second half versus a year ago," CFO Andrew Bonfield said.

Overall sales in North America were up 1%, while sales in its construction equipment business were flat.

Benefits from President Joe Biden's 2021 infrastructure law, a $1 trillion enactment aimed at upgrading roads, bridges, and other transport infrastructure, are beginning to taper after helping weather weakness in the company's other regions.

Meanwhile, equipment sales in Asia-Pacific declined 9%, while they fell 16% in Europe, Africa and Middle East (EAME). Latin America was a bright spot with a 5% bump.

"Sales to users declined in EAME, primarily due to weakness in Europe-related new residential construction and economic conditions," Umpleby said.

Changes in dealer inventories led to the decrease in volume, Caterpillar said. Dealer inventory decreased by about $200 million during the second quarter, compared with an increase of $600 million in the year-ago period.

The years-long crisis in China's real estate market has pressured Caterpillar's sales for the past several quarters.

The company also cited a weak Japanese yen for the drop in sales in Asia-Pacific during the quarter.

Caterpillar reported an adjusted profit per-share of $5.99, compared with estimates of $5.54, according to LSEG data.

(Reporting by Shivansh Tiwary and Abhinav Parmar in Bengaluru; Editing by Sriraj Kalluvila)