Can Caterpillar Continue Its Strong Revenue Run Rate In 2019?

Caterpillar (NYSE:CAT) is the world’s leading manufacturer of construction and mining equipment, diesel and natural-gas engines, industrial gas turbines and diesel-electric locomotives. The company achieved robust growth in fiscal 2018, with revenue growing by more than 20% primarily driven by higher sales volume across operating segments. Caterpillar also recorded its highest-ever adjusted earnings per share of $11.22 for the year.

Trefis captures trends in Caterpillar’s Revenues over recent years in an interactive dashboard along with our forecast for the current year. We expect the company to achieve steady revenue growth and add more than $1.7 billion to its top line in FY’19. You can view the Trefis interactive dashboard to better understand the revenue trends and division-wise revenue performance, and alter the assumptions to arrive at your own estimate for the company’s revenues.

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 (Insurance Services) and their respective subsidiaries.

How Has Caterpillar’s Historical Revenue Trended? 

• Caterpillar has added more than $16 billion to total revenue since 2016 at an average annual rate of 19% driven by robust growth in machinery, energy and transportation segments.
• Construction segment has been the largest growth driver, accounting for roughly 50% of Caterpillar’s growth during the last three years.
• Going forward, we expect Caterpillar’s revenues to increase by 3% and cross $56 billion in FY 2019.

A Detailed Look At Caterpillar’s segment performance and revenue change over the years:

Construction Industries is Caterpillar’s Largest Operating Segment

• Construction segment consistently contributes a majority of its revenues, with an average revenue share of more than 40% in the last four years.
• Moreover, the segment’s share has increased from less than 38% in 2015 to more than 42% in 2018 primarily due to faster growth than the Energy & Transportation segment.
• The segment grew by a whooping 20% in fiscal 2018, contributing approximately $4 billion to total incremental revenues.
• We expect the segment to continue its strong growth trajectory and generate almost $24 billion in revenues in FY 2019.
• This growth is expected to be led by higher end-user demand for construction equipment. Moreover, healthy U.S. economy coupled with stable local funding for infrastructure development will aid the segment’s top-line growth in the near term.

Resource Industries is Caterpillar’s fastest growing segment

• Resource segment has achieved robust growth in the last few years, with revenues increasing from $5.7 billion in 2016 to almost $10 billion in FY 2018 mainly due to higher equipment demand, favorable price utilization and increased services.
• We expect this segment to continue its strong growth, with revenues increasing at a rate of 6% to $10.5 billion in FY 2019.
• Moreover, 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 coming quarters
• The segment’s contribution to total revenues has steadily increased over the years – a trend which is expected to continue for the foreseeable future

Energy & Transportation Segment Has Grown At A Brisk Pace Over The Past Few Years

• Energy & Transportation has added more than $4.4 billion to total revenues since 2016 at an average annual rate of 14%.
• This growth can be attributed to higher sales volume across all applications as well as favorable price realization
• We expect segment revenues to improve in the low single-digit range in 2019, 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.

Financial Products’ Contribution Has Remained In The Mid-Single-Digits

• The segment’s growth has essentially remained flat over recent years, adding approximately $15 million in net revenue over 2016-2018 (CAGR of 2%).
• In 2019, we expect this segment to add nearly $5 million to total revenues likely driven by higher average financing rates and higher average earning assets in North America and Asia/Pacific.
• The segment’s share of total revenues has remained around 6% over the years, and going forward, we expect its share to settle around 5%.

Based on our forecast, Caterpillar’s adjusted EPS for fiscal 2019 is likely to be around $11.68. Using this figure with our estimated P/E ratio of 13x, this works out to a price estimate of $153 for Caterpillar’s stock, which is roughly 15% ahead of the current market price.

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