Key Takeaways From Caterpillar’s Q3

by Trefis Team
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Caterpillar (NASDAQ: CAT) posted another impressive quarter and sustained its growth trend in Q3. The company comfortably beat consensus estimates, with its revenue coming in at $13.5 billion (+18% y-o-y), and its adjusted earnings per share coming in at $2.86 (+47% y-o-y). Much of the revenue growth came from its Construction Industries segment across all regions except Latin America, as a result of increased oil and gas activities, construction activities and infrastructure development in China, Europe, Middle East and Africa (EMEA) and North America. Further, Caterpillar’s adjusted earnings grew by nearly 47% to $2.86 – a record for Q3, as a result of higher sales volume, improved operational performance, a lower tax rate, and cost efficiency. Despite this, the stock plunged nearly 6% mainly due to Caterpillar maintaining its 2018 outlook and reiterating the impact of rising costs due to U.S. tariffs. However, we expect 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. Moreover, headwinds in the construction industry coupled with market uncertainty – as a result of 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.

Based on the recent results and market trends, we have revised our forecasts for Caterpillar for the full year. We have updated our model – cutting our price estimate for Caterpillar slightly to $160, which is still significantly higher than the market price, based on the expected performance of the industry. Our interactive dashboard analysis on Caterpillar’s Performance In Q3 And Expectations For 2018 details our expectations for the company. You can modify the different driver assumptions, and gauge their impact on the company’s earnings and valuation.

Factors That May Have An Impact In The Upcoming Quarters

The Resource Industries segment was the fastest-growing segment in Q3, sustaining its growth momentum. The segment grew 35% year-on-year to $2.6 billion, as a result of increased demand for new mining and heavy construction equipment across regions and improved replacement demand. This increased demand was driven by increased demand for fossil fuels in emerging economies, strong global economic growth and infrastructure investment, resulting in healthy order activity. Additionally, a recovery in commodity prices, coupled with full-scale fleet replacement should drive increased end-user demand for new equipment. Furthermore, 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.

The Energy and Transportation segment is the most diverse division and caters to a wide array of end markets. The segment revenue grew 15% year-on-year to $5.6 billion, as a result of broad based improvement across all applications except Industrials. The robust growth was largely due to increased demand for its reciprocating engines, aftermarket parts, gas powered applications, and improved rail activity in North America. Rising populations and prosperity in developing markets should likely lead to a rise in demand for energy. We expect this increased demand for energy to increase long-term demand for reciprocating engines and turbines.

Construction Industries revenue was up 16% year-on-year to $5.7 billion, forming nearly 46% of the company’s net revenues. The strong performance was 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. Additionally, we expect increased demand for its equipment as a result of enhanced oil and gas activities in the U.S. 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 a 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, Construction Industries holds significant growth potential for Caterpillar.

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