What To Expect From Caterpillar’s Q3 Earnings

by Trefis Team
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Caterpillar (NASDAQ: CAT) is scheduled to announce its third quarter results on Tuesday, October 23. Consensus market estimates call for the company to report revenue of $13.2 billion and adjusted EPS of $2.84. Construction Industries, which generates nearly 42% of the company’s revenues, grew by over 30% and drove most of Caterpillar’s growth in the first half of 2018. The robust performance of this division was largely due to increased construction activities in most end markets – driven primarily by China and North America. The Energy & Transportation segment, which generates nearly 38% of the company’s revenue, grew by about 23% as a result of strong demand for reciprocating engines, aftermarket parts, and improved rail activity in North America. We believe strong construction spending, coupled with the strengthening of the U.S. economy and healthy order backlog in most end markets, should drive Q3 results. Further, Caterpillar’s cost cutting measures should help it offset the recently imposed tariffs. Below we take a look at what to expect when the company reports earnings.

We have a $168 price estimate for Caterpillar, which is substantially higher than the current market price. The charts have been made using our new, interactive platform. You can click here for our dashboard on Our Outlook For Caterpillar In Q3 to modify different drivers, and see their impact on the revenue, earnings, and price estimate for Caterpillar.

Factors Driving Near Term Growth

Construction Industries holds significant growth potential for Caterpillar, as a result of the robust 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. Construction spending is forecasted to remain strong in the medium term, driven by improved U.S. macroeconomic conditions, which should boost the U.S. Housing market and construction spending. Further, the proposed remodeling of existing infrastructure in Europe, coupled with the increasing significance of smart cities should aid increased infrastructure spending and provide for a meaningful growth opportunity. Additionally, rising prosperity and population, together with improved construction activities in growing markets such as China and India should drive spending.

The Energy and Transportation segment is the most diverse division and caters to a wide array of end markets. This division saw robust growth in the first half of 2018 as a result of increased demand for its reciprocating engines, aftermarket parts, gas powered applications, and improved rail activity in North America. Rising population and prosperity of developing nations should likely lead to a rise in demand for energy. We expect this increased demand for energy to increase long-term demand for engines and turbines. Further, the increase in rail traffic in North America should boost transportation & power generation sales.

The Resource Industry segment enjoyed a strong first half of 2018, as a result of higher replacement demand and demand for new mining equipment, which was driven by increased demand for fossil fuels in emerging economies, resulting in strong order activity. Further, recovery in commodity prices, coupled with full scale fleet replacement should drive increased end-user demand for new equipment. In addition, emerging economies will continue to drive the growth of the Mining Industry, which should lead to increased mine production and greater machine utilization, which in turn should drive spare part sales.

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