Caterpillar: Energy and Transportation Segment’s Margin Rose



Energy and Transportation segment

Caterpillar’s (CAT) Energy and Transportation segment contributed a revenue share of 40.8% in the second quarter. The segment’s revenue share fell by 1.2 percentage points on a YoY (year-over-year) basis. The segment reported revenues of $5.72 billion in the second quarter, which implies an increase of 20.0% on a YoY basis. In the second quarter of 2017, the segment reported revenues of $4.76 billion.

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The Energy and Transportation segment’s revenues grew due to higher sales volumes across all of the businesses in the segment. The segment’s revenue growth was also impacted by foreign currency due to the stronger euro against the dollar. Finally, favorable price realization also pushed the revenues up.

According to Caterpillar, the oil and gas business accounted for 39% of the growth. The demand for gas compression, well servicing, and production applications grew substantially in North America. Higher crude oil prices caused onshore drilling to increase. In the EMEA region, there was growth in the gas power generation market. The transportation business had higher revenues due to acquisitions in the Asia-Pacific region and Europe. Rail services and marine sales increased during the quarter.

Operating profit and margin

The Energy and Transportation segment reported an operating profit of $1.01 billion in the second quarter compared to $694.0 million in the second quarter of 2017—an increase of 45.9% YoY. The segment reported an operating profit margin of 17.7% in the second quarter compared to 14.6% in the second quarter of 2017—an increase of 310 basis points YoY. The segment’s operating income and margin increased due to higher sales volumes, favorable price realization, and a decrease in the short-term incentive compensation expense. Increased freight costs had a negative impact on the segment’s profit and margin.

Investors can hold Caterpillar indirectly by investing in the iShares U.S. Industrials ETF (IYJ), which has invested 2.4% of its portfolio in Caterpillar. The fund also provides exposure to Boeing (BA), 3M (MMM), and Honeywell (HON) with weights of 5.5%, 3.5%, and 3.3%, respectively as of July 31.


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