Can Construction, Resource, Energy & Transportation Businesses Drive Growth For Caterpillar In Q4?

by Trefis Team
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Caterpillar (NASDAQ: CAT) has had a robust year so far. The company’s revenue grew by nearly 24% in the first three quarters of 2018, and we expect this trend to continue when the company reports its fourth quarter earnings on January 28. We believe improved construction spending, coupled with the strengthening of U.S. GDP, healthy order backlog in most end markets, and sustained focus on cost cutting, should drive Q4 results. As a result, we expect a major chunk of its Q4 growth to be driven by solid performances from its Construction Industries and Energy & Transportation segments. In addition, solid outlook of Resource Industries segment should further boost Q4 earnings. Consequently, we expect Caterpillar’s 2018 revenue and EPS to grow by 19% and 69%, respectively, and Q4 results will likely be along the same lines.

Our price estimate for Caterpillar’s stock stands at $160, which is around 15% above the market price. We have also created an interactive dashboard which outlines what to expect from CAT’s full-year results. You can modify the key value drivers to see how they impact the company’s revenues and bottom line. Below we discuss some of the key factors that are likely to impact the mining and construction equipment giant’s earnings.

Factors That Should Drive Near Term Growth
Caterpillar’s Construction Industries segment grew by just under 26% y-o-y to $17.5 billion, forming nearly 43% of the company’s net revenues. This division 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 continued improvement in residential and non-residential construction in North America. Further, the improved outlook of the U.S. economy should not only boost the U.S. Housing market, but also drive increased construction spending. In addition, remodeling of existing infrastructure in Europe, coupled with the growing significance of smart cities, should aid increased infrastructure spending and provide for a meaningful medium-term growth opportunity. However, the recent slowdown in machinery sales in China should slightly dampen the near term outlook.
The Energy and Transportation segment is Caterpillar’s most diverse portfolio and caters to a wide array of end markets. This segment saw robust growth in the first nine months of 2018 as a result of improved demand for its reciprocating engines, aftermarket parts, gas powered applications, and enhanced rail activity in North America. We expect improved sales for oil and gas machinery in the quarter, as a result of stable oil prices. Further, improving global macro conditions and higher end-user demand across most applications should result in higher engine sales for industrial applications. In addition, the recent acquisitions in rail services, coupled with increased rail traffic in North America, should boost its transportation sector. Consequently, we expect this sector to grow by nearly 19% y-o-y to slightly over $19 billion in 2018.

The Resource Industry segment enjoyed a strong first nine months 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. We expect this trend to spill over into Q4 and drive the segment’s revenue. Additionally, continued robust demand for its aftermarket parts should further drive its near term revenue. Further, an uptick in capital spending by multiple mining companies bodes well for the segment. In addition, recovery in commodity prices, coupled with full scale fleet replacement should drive increased end-user demand for new equipment. As a result, we expect this sector to grow by nearly 25% y-o-y to about $9.4 billion in 2018.

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