Caterpillar Looks Set To Report Strong Q2 Performance Across Segments

by Trefis Team
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Caterpillar (NYSE:CAT) is slated to publish its Q2 2019 results on Wednesday, July 24. After reporting a strong performance in the first quarter, the industrial conglomerate is expected to continue its momentum in Q2. Trefis estimates Caterpillar’s valuation to be $153 per share, which is roughly 10% ahead of the current market price. We have summarized trends in Caterpillar’s Earnings over recent quarters along with our full-year expectations in an interactive dashboard. You can modify any of our key drivers to gauge the impact of changes on the company. Additionally, you can see all Trefis Industrial Data here

A Quick Look At Caterpillar’s Revenues

Caterpillar reported $54.7 billion in Total Revenues in Fiscal 2018. This included 4 revenue streams:

  • Construction Industries: $23.1 billion in FY 2018 (42% of Total Revenues). 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: $9.9 billion in FY 2018 (18% of Total Revenues). Resource Industries includes machinery used in mining, quarry and aggregates, heavy construction, waste and material handling applications
  • Energy & Transportation: $18.8 billion in FY 2018 (35% of Total Revenues). Energy & Transportation includes products and related parts used in oil and gas, power generation, marine, rail and industrial applications
  • Financial Products: $2.9 billion in FY 2018 (5% of Total Revenues). This segment includes Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings Inc. (Insurance Services) and their respective subsidiaries.

Construction Industries segment revenues likely to continue upward trend in Q2:

  • Construction segment delivered a decent performance in Q1, with revenue growing by 3% to $5.9 billion driven by strong demand in North America. We expect this segment to achieve steady growth in Q2 likely to led by higher end-user demand for construction equipment.
  • Moreover, healthy U.S. economy coupled with a stable local funding for infrastructure development will further aid the segment’s top-line growth in the near term.
  • However, this growth is likely to be offset by weakness in residential construction and a subdued demand in China and Latin America.

Resource segment is Caterpillar’s fastest growing segment:

  • Resource segment has been Caterpillar’s fastest growing segment over the recent years, adding more than $4 billion in revenues since 2016. The segment’s revenues surged by 19% (y-o-y) in Q1 mainly due to higher equipment demand, favorable price utilization and increased services.
  • Moreover, solid demand from mining and heavy construction equipment, including quarry and aggregate contributed to higher sales volumes. We expect this trend to have carried over in Q2, and remain over the rest of the year.
  • We forecast segment revenues to grow in mid-single-digits in the near term. Strong commodity market fundamentals, robust demand from Asia-Pacific region, higher demand levels for non-residential construction activities and increased demand for heavy construction, quarry and aggregate equipment will aid the segment’s growth over the foreseeable future.

Upbeat Demand For Oil & Gas Products To Drive Energy & Transportation’s Growth:

  • Energy & Transportation sales in the first quarter were $5.2 billion – comparable to the figure in Q1 2018, as favorable price realization and higher sales volumes more than made up for unfavorable currency sheet.
  • While sales into oil and gas applications decreased by 7%, sales into power generation applications rose by 7% – mitigating the impact on the top line.
  • However, the segment’s operating profit margin contracted by 60 basis points to about 16% due to higher manufacturing costs driven by freight costs and warranty expense.
  • We expect segment revenues to improve in the low single-digit range in the near term, driven by strong demand for power generation and gas compression equipment and improved demand for rail services, slightly offset by volatility in oil prices and take-away constraints in the Permian Basin.
  • Moreover, the margins are also expected to see an improvement due to stronger demand from oil and gas customers in North America.

Trefis Estimate for Caterpillar’s Valuation

  • We expect Caterpillar’s adjusted EPS for full-year 2019 to be around $12.06. Using this figure with our estimated forward P/E ratio of 12.7x, this works out to a $153 price estimate for Caterpillar’s stock (shows cash and valuation analysis). Our price estimate is around 10% ahead of the current market price.

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