How Much Will Construction Industries Contribute To Caterpillar’s Top Line Growth In Next Two Years?

by Trefis Team
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Caterpillar (NASDAQ: CAT) has performed modestly over the past couple of years. The company saw its revenue fall by nearly 18% between 2015-2016, largely due to lower end-user demand for its new equipment and aftermarket parts across segments, as a result of mixed economic conditions across North America, Latin America, and EMEA. However, improved construction activities in most end markets, recovery in commodity prices, improved rail traffic, and increased demand for its reciprocating engines and industrial equipment in North America helped boost its top line in 2017, with revenue growing at just over 18%. The Construction Industries segment contributes nearly 42% of the company’s overall revenue and the segment revenue grew by nearly 5% annually between 2015-2017. Below we take a look at what to expect from Caterpillar’s Construction Industries segment in the next two years.

Based on recent market trends and the improved near-term outlook provided by the company’s management, we forecast Caterpillar to report 12-13% annual revenue growth in the next two years, from $45.5 billion in FY 2017 to about $58 billion in FY 2019. Of the estimated $12.6 billion incremental revenues, we estimate that the Construction Industries segment will contribute just over 41%, or $5.2 billion. We have summarized our expectations on our interactive dashboard on Caterpillar’s Construction Industries through FY’18 and FY’19 on an. If you disagree with our forecasts, you can change the key drivers for Construction Industries segment to gauge how changes will impact its expected revenue. Below we take a look at the key drivers for this revenue stream.

The Construction Industries segment generates revenue from sales of construction equipment and services. This segment has been the fastest growing business of late, with revenues witnessing around 5% annual growth between 2015-2017, reaching just under $19.2 billion in 2017. Construction spending is projected to remain strong in the medium term, due to the strengthening of the U.S. economy, which should boost the U.S. Housing market and construction spending. Further, the proposed renovation of existing infrastructure in Europe, coupled with the growing importance of smart cities should aid increased infrastructure spending and provide for significant growth opportunity.  In addition, growing affluence and population, together with improved construction activities in developing markets – such as China and India – should further drive spending. Consequently, we estimate the segment’s revenue to grow just under 13% annually going forward.

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