What To Expect From Caterpillar’s Q1

by Trefis Team
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Caterpillar (NYSE:CAT) is expected to publish its Q1 2019 results on April 24. The company achieved robust growth in fiscal 2018, with revenue growing by more than 20%, while its stock price jumped nearly 70% in 2018. The company also recorded its highest-ever adjusted earnings per share of $11.22, primarily driven by higher sales volume across operating segments. We expect Caterpillar’s revenue to increase by 4% (y-o-y) to $13.4 billion in Q1 2019, while EPS is expected to come in around $2.90 compared to $2.74 reported in the prior-year quarter.

We have summarized our full year expectations for CAT based on the company’s guidance and our own estimates, in our interactive dashboard How Is Caterpillar Likely To Have Fared In Q1? You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see more Trefis Industrial Data here. Below we highlight some of the key revenue drivers that are likely to impact Caterpillar’s future performance.

How have Caterpillar’s revenues changed over recent quarters, and what’s the forecast for Q1 2019?

  • Total revenues for Caterpillar have largely trended higher over recent quarters. Revenues grew from $12.9 billion in Q4 2017 to $14.3 billion in Q4 2018.
  • The growth can primarily be attributed to higher sales volume across operating segments along with favorable price realization. An increase in dealer inventories also contributed to higher sales in 2018.
  • We estimate total revenues to be $13.4 billion for Q1, 4% higher than what it reported a year ago.

What are Caterpillar’s key sources of revenues?

Caterpillar generates its revenues from various industrial segments, including Construction, Resource, and Energy and Transportation.

  • Construction Industries includes machinery in infrastructure, forestry and building construction. The majority of machine sales in this segment are in the heavy and general construction sector.
  • Resource Industries includes machinery used in mining, quarry and aggregates, heavy construction, waste and material handling applications
  • Energy & Transportation includes products and related parts used in oil and gas, power generation, marine, rail and industrial applications.

What to expect from the Construction segment:

  • Construction revenues grew from $5.3 billion in Q4 2017 to $5.7 billion in Q4 2018. We forecast the revenues to increase in low single-digits to $5.5 billion in Q1 2019 due to strong demand in North America partially offset by subdued demand in China.
  • Strong U.S. economy and strength in pipelines and local infrastructure development are likely to boost machinery demand in North America
  • The U.S. construction sector is forecast to grow in mid-single-digits over the next three years. However, Caterpillar expects sales from the construction segment to be flat in China, which represents about 10% to 15% of the company’s total construction industry sales.

What to expect from the Resource segment:

  • Resource revenues increased from $2.3 billion in Q4 2017 to $2.8 billion in Q4 2018, due to higher demand for both mining and heavy construction equipment, including aftermarket parts. Moreover, favorable commodity price levels and increased mining production contributed to higher mining equipment sales.
  • We forecast the segment revenues to grow in mid-single-digits in the near term. Strong commodity market fundamentals and demand for heavy construction, quarry and aggregate equipment will aid the segment’s growth in fiscal 2019.

What to expect from Energy & Transportation:

  • Caterpillar’s energy segment revenue grew from $5.6 billion in Q4 2017 to $6.3 billion in Q4 2018. This growth was driven by increased oil and gas activity in North America and higher demand for power generation equipment across geographic regions.
  • We forecast the revenues to remain flat in Q1, as volatility in oil prices and takeaway constraints in the Permian Basin will adversely impact demand for servicing equipment. This is likely to be offset by strong demand for power generation and gas compression equipment and improved demand for rail services.

What will be the impact of the above on Caterpillar’s Earnings?

  • We expect the company’s earnings to be $2.90 per share in Q1, 6% higher than the prior year quarter. The growth in earnings will likely be led by higher revenues, and improved margins.
  • Our $151 price estimate for Caterpillar, which is around 10% ahead of the market price, is based on full-year EPS of $12.30 and a forward PE multiple of 12x.

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