How Will Caterpillar Perform In Second Half Of 2018 After Strong Q2 Growth?

by Trefis Team
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Caterpillar (NASDAQ: CAT) reported a solid 24% increase in revenues to just over $14 billion in Q2. Much of the revenue growth came from its Construction Industries segment, as a result of increased construction activities and infrastructure development in China and North America. Construction Industries revenue was up 24% year-on-year to $6.2 billion, forming nearly 47% of the company’s net revenues. In addition, Energy & Transportation segment revenue grew 20% year-on-year to $5.7 billion. Caterpillar nearly doubled its adjusted earnings to $2.97, as a result of higher sales volume, lower tax rate, and cost efficiency. Further, management raised its full year guidance based on continued improvement in most of the end markets in first half of 2018 – due to robust order rates and backlogs. We believe the recently imposed tariffs will have a relatively minimal impact in 2018, and the strong order backlog in most end markets should drive the company’s full year results. However, headwinds in the construction industry coupled with the ongoing tariff war should slightly dampen the medium term outlook. Below, we provide a brief overview of the company’s results and what lies ahead.

We have updated our model – cutting our price estimate for Caterpillar slightly to $168, which is still above the market price, based on the expected performance of the industry. Our interactive dashboard analysis on Caterpillar’s Performance In Second Half Of 2018 details our expectations for the second half of 2018. You can modify the different driver assumptions, and gauge their impact on the company’s earnings and valuation.

Based on the recent results and market trends, we have revised our forecasts for Caterpillar for the full year. We forecast Construction Industries revenues to be up slightly over 19% to almost $23 billion for the year. Similarly, Energy & Transportation revenues are forecast to increase around 18% to just under $19 billion. The strong growth should be driven by broad-based improvement in most end markets as a result of healthy order rates and backlogs.

Construction Industries holds substantial growth potential for Caterpillar, as a result of the strong demand for its products across the Asia Pacific, North America, and EMEA markets, coupled with significant investments in nonresidential construction, infrastructure, and oil & gas related projects. Growing affluence and population, together with improved construction activities in developing markets – such as China and India – should drive spending. In addition, the increased construction activity in North America should further boost segment revenue.

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