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Caterpillar (CAT +4%) is trading higher after reporting Q2 results this morning. The company reported a hefty EPS beat, its sixth consecutive beat by $0.40 or more. Revenue declined yr/yr as expected, but it was a bit more than expected. Revenue declined 3.6% yr/yr to $16.69 bln, a bit below analyst expectations. However, it was not entirely surprising, we saw a similar pattern of a large EPS beat with a slight top line miss in Q1.

• The revenue decline was primarily due to lower sales volume, partially offset by favorable price realization. Sales volume declined slightly more than CAT had expected, while price realization, including geographic mix, was better than anticipated. Dealer inventory also declined in Q2 yr/yr. Dealers inventory decreased more during 2Q24 than during 2Q23. That means dealers are holding leaner inventories, which impacts sales.
• By segment, Construction Industries (infrastructure and building construction) sales fell 7% yr/yr to $6.68 bln, primarily due to lower sales volume, partially offset by favorable price realization. The decrease in sales volume was mainly driven by the impact from changes in dealer inventories. Government related infrastructure projects remained healthy. Sales in North America were about flat, although sales increased in Latin America.
• In fairness to CAT, it has been lapping a record level of CI sales in 2023. Sales to users in 2H are now expected to decline slightly yr/yr. For North America, CAT now anticipates slightly lower construction industry sales to users for FY24, primarily due to weaker than expected rental fleet. In Asia Pacific outside of China, CAT still expects soft economic conditions. Demand in China is expected to remain low. CAT also expects weak economic conditions in Europe will continue.
• Its Resource Industries (mining, heavy construction, quarry, aggregates) segment saw the biggest decline, with sales down 10% yr/yr to $3.21 bln, also primarily due to lower sales volume, partially offset by favorable price realization.
• The one segment that grew was Energy & Transportation (oil & gas, power generation), where sales rose 2% yr/yr to $7.34 bln. Sales increased across all applications except Industrial. The increase in sales was primarily due to favorable price realization, partially offset by lower sales volume. Power Generation was a notable bright spot with sales jumping 15% to $1.89 bln, fueled by large reciprocating engines, primarily data center applications. Turbines and turbine-related services increased as well.
• Despite the revenue decline, CAT was still able to increase adjusted operating margin to 22.4% vs 21.3% a year ago. It's rare to see a company increase margins when they post a sales decline. Margins were better than expected, mainly due to favorable manufacturing costs and product mix. Also, price was slightly better than CAT had anticipated, driven by its E&T segment.

Overall, investors seem pretty pleased with CAT's Q2 report. Revenue declined yr/yr and that will continue in 2H. However, CAT is lapping a strong year in 2023 when sales jumped 14%. Also, it's impressive that CAT has been able to expand margins even on lower sales. Furthermore, Power Generation was a notable bright spot as it's benefitting from the AI data center infrastructure buildout. CAT is not usually thought of as a beneficiary, but it's a nice business for them.