Caterpillar can benefit from AI in these two ways: Analyst

Shares of Caterpillar (CAT) are moving to an all-time high Monday morning following a release of its fourth-quarter earnings, which easily beat Wall Street expectations. The company reported full-year sales and revenues were up about 13%.

D.A. Davidson Equity Research Managing Director Michael Shlisky joins Yahoo Finance to discuss the company's performance, domestic and international business, and how it could operate moving forward with AI.

When asked about Caterpillar's potential with AI, Shlisky says: "There is definitely a story, probably a few years away. Two areas where they're kind of looking at, one is in safety. What's been a challenge is trying to find labor that can actually use these complex machines. If you make some of the safety areas of the equipment easier to use, you can perhaps widen the labor pool. That's certainly one area. The other is in asset tracking. So they have some of these, I think on there already, it's helping to position the machines for optimal performance in the field. This year, and certainly over the next two to five years, I think we'd see a lot more autonomy in their portfolio. "

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Editor's note: This article was written by Nicholas Jacobino

Video Transcript

- Caterpillar shares surging to an all-time high-- up just about 3% after the company beat on fourth quarter profit expectations; construction giant seeing equipment volumes and international construction sales fall, but higher prices made up for some of that decline.

We want to bring in Michael Shlisky. He's DA Davidson managing director of Equity Research. It's great to have you here, Michael. Let's talk about this report because, yes, we are seeing shares move to the upside, up just another 3% today. Demand staying resilient, yet there was some weakness, especially when you look at the international component.

- Yes, there was some weakness. Certainly, North America still drives the bus at Caterpillar, so there seems to be not much of a slowdown there, particularly in construction where, obviously, they are one of the strongest players, if not the strongest globally.

Outside of the US, though they did mention some slowdown in Asia excluding China as well as China itself, they think that China will be a somewhat weak year. 25%, 10% of sales. But certainly, if that's going to be an additional weak year here, probably their third in a row, international is going to be a challenge for them for the near term.

- So with that in mind, they mentioned favorable price realization. How much additional price can they push through?

- Well, for the last couple of years, Brad, it's been well over 5%, 10% of price on average. It's getting a lot more normalized, especially in the first half of the year. They'll get a few percent. It might turn flattish or just slightly up in the back half of the year.

That's probably a good thing. They have much better visibility on their manufacturing costs. They have much better visibility on their dealership inventories. And so having a somewhat muted low, modest increase in price over the prior year probably is not the worst thing in the world for Caterpillar at this point

- Michael, supply chain constraints has been one of the story lines for Caterpillar over the last several quarters. What does that look like? Has that started to ease significantly?

- It started to ease mainly. However, there's one area that they will be expanding in and that's their large engine business. It has been capacity constrained. They've had great demand there across most of their end markets-- mining, oil and gas, heavy industry, et cetera. They're now going to spend the next year or two investing more in that capacity. But yes, otherwise, it has largely caught up.

- Does Caterpillar have an artificial intelligence play, Michael? It feels like we hear so much from the industrial companies about-- and construction companies about where that can be embedded even into some of their equipment that they're trying to put into the market. Is there a story there at all?

- There is definitely a story that I've read. It's probably a few years away. Two areas where they're looking at it, one is in safety, so what's been a challenge is trying to find labor that can actually use these complex machines. If you make some of the safety areas of the equipment easier to use, you can perhaps widen your labor pool. So that's certainly one area.

The other is in asset tracking. So they have some of these-- I think on there already, but it's helping to position the machines for optimal performance in the field. So yes, it's not this year, but certainly over the next two to five years, I would think, we'd see a lot more autonomy in their portfolio.

- Michael, Caterpillar are often looked at as an economic bellwether, right? When you take into account the demand that they're seeing for the machines normally are or many times looked at as a leading indicator. What do you think this tells us just about what we will likely see play out for the rest of the sector this earnings season?

- Well, it certainly sounds like there's a lot of confidence out there among US construction companies and their various fleets, whether their own fleets or if they are rented. So it does suggest, as you would imply, that people are confident with making investments in 2024 in equipment, even in a higher interest rate environment.

If we start seeing rates go lower, I wouldn't be surprised to see even additional confidence, I think, from the construction sector.

- Michael Shlisky who is the DA Davidson managing director of Equity Research. Michael, thanks so much for taking the time here with us today.

- Thank you.

- Absolutely.