Key Takeaways From Caterpillar’s Q4

by Trefis Team
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Caterpillar‘s (NASDAQ: CAT) stock fell nearly 10% after the company reported lower than expected Q4 earnings on January 28 – largely as a result of the tariffs imposed on Chinese imports and weaker than expected 2019 guidance. Despite underperforming consensus estimates, Caterpillar still achieved some progress. The adjusted earnings per share came in at $2.55 (+18% y-o-y), while its revenue came in at $14.34 billion (+11% y-o-y). The result was slightly dampened by the slowdown in sales in China, as a result of the ongoing trade war with the U.S., which resulted in lower than expected demand for its products. However, we believe increased construction spending, coupled with increased CapEx spending by mining companies, the strengthening of U.S. GDP, recovery in commodity prices, and sustained focus on cost cutting, should drive its near term results. Moreover, headwinds in the energy and transportation division as well as further market uncertainty – as a result of the ongoing tariff war – should slightly dampen the near term outlook. Below, we provide a brief overview of the company’s results and what lies ahead.

 Our price estimate for Caterpillar’s stock stands at $160, which is now significantly higher than the current market price. We are in the process of updating our model to account for the company’s FY’18 results. We have also created an interactive dashboard which outlines what to expect from Caterpillar in 2019. 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 brokerage’s earnings.

The Resource Industries division continued its robust growth momentum and was the fastest-growing segment into Q4. The segment grew nearly 21% year-on-year to just under $2.8 billion, primarily driven by improved demand for both mining and heavy construction equipment across regions and solid replacement demand. This increased demand was largely due to improved commodity prices and solid infrastructure investment, resulting in healthy order activity. We expect this trend to continue into 2019 and drive the segment’s revenue. Additionally, 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 segment’s revenue to grow by about 12% y-o-y to about $10.5 billion in 2019.

The Energy and Transportation segment caters to a wide array of end markets. The segment revenue grew 11% year-on-year to $6.3 billion, as a result of solid growth across all applications except Industrials. The was mainly due to increased demand for its reciprocating engines, aftermarket parts, gas powered applications, improved rail traffic and recent acquisitions in rail services. We expect these trends to carry over into 2019 and drive the segment’s revenue. However, the recent oil price fluctuations, coupled with the Permian basin takeaway constraints, should slightly dampen the demand for its well servicing applications. Consequently, we expect this segment to grow by nearly 8% y-o-y to about $20.6 billion in 2019.

Construction Industries revenue was up 8% year-on-year to $5.7 billion, forming nearly 40% of the company’s net revenues. The strong performance was as a result of the robust demand for its products across North America and EMEA, coupled with significant investments in nonresidential construction, infrastructure, and oil & gas related projects. However, subdued demand from China – largely driven by trade war tensions – and Latin America slightly dampened the segment performance. China accounts for roughly 15% of overall construction industries sales, and we expect this ongoing trade dispute to slightly dampen the segment’s outlook in 2019. Nevertheless, the improved macroeconomic conditions in the U.S. should not only drive increased construction spending, but also boost the housing market. Further, the company believes continued pipeline construction and substantial infrastructure spending – at both local and state levels – should drive 2019 results.

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