How Will Steel Tariffs Impact Caterpillar?

by Trefis Team
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U.S. President Donald Trump in March announced that the U.S. would levy a 25% tariff on steel imports and a 10% duty on aluminum. While Mexico, Canada, and the E.U. were exempted from this initially, this was also changed at the beginning of June. The implementation of these tariffs will no doubt increase the costs for companies like Caterpillar (NASDAQ: CAT), whose stock is down year-to-date given the negative sentiment. The industrial giant, which sells more than half of its equipment overseas, expects that these tariffs could hike both imported and domestic steel prices. Caterpillar’s Construction Industry segment, which is heavily reliant on steel prices, will be most vulnerable to these tariffs. Consequently, we expect the margins for the segment to fall roughly 100 basis points.

Based on the tariffs, we expect the Construction segment’s EBITDA margin to fall from 15% to 14% in 2018, as a result of increased costs. This could lead to a modest valuation downside for Caterpillar. We have summarized our expectations on our interactive dashboard platform. If you disagree with our forecasts, you can change the key drivers for Construction segment to gauge how changes will impact its expected revenue and margin.
The Construction Industry segment generates revenue from sales of construction equipment and services. Construction spending is forecast to remain strong in 2018, with increased construction activity in North America boosting the segment’s revenue. In addition, the growing affluence and population, together with improved construction activities in developing markets – such as China and India – should drive spending. Moreover, the increase in raw material costs, as a result of the steel tariffs, should result in a hike in prices of the goods manufactured by Caterpillar. As a result of these factors, if the 2018 revenue rises to just over $24 billion, from an expected $22.6 billion earlier, it can help to offset the negative impact of falling margins.

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