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Caterpillar’s Construction Industries Segment in Q2 2018

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Caterpillar’s Construction Industries segment

Caterpillar’s (CAT) Construction Industries segment is the company’s most significant revenue contributor. The segment had a revenue share of 44.0% in the second quarter. The segment’s revenue share fell by 0.2 percentage points on a YoY (year-over-year) basis. The segment reported revenues of $6.17 billion in the second quarter, which implies an increase of 24.4% on a YoY basis. In the second quarter of 2017, the segment reported revenues of $4.6 billion.

The Construction Industries segment’s revenues grew primarily due to higher volumes in construction equipment and favorable foreign currency specifically from the strong euro and yuan. However, the weaker price realization had a negative impact on the segment’s revenues.

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On a geographical basis, Asia led the pack with 43% growth due to increased construction and infrastructure investment in China. The EMEA (Europe, Middle East, and Africa) region grew 21% due to favorable currency and demand in construction activities across several countries in the region. North America increased 18% due to the oil and gas industry. Latin America grew 8% despite weaker construction activities in the region.

Operating profit and margin

The Construction Industries segment reported an operating income of $1.15 billion in the second quarter compared to $900.0 million in the second quarter of 2017—an increase of 28% YoY. The segment reported an operating profit margin of 18.7% in the second quarter compared to 18.1% in the second quarter of 2017—an increase of 60 basis points YoY. The segment’s operating income and margin increased due to higher revenue growth. However, increased selling, general, and administrative expenses, more raw materials, and freight costs had a negative impact on the profit and margins.

Outlook

The upward momentum will likely continue with higher demand in the Asia-Pacific region, China, and North America. However, Latin America might continue to be sluggish. Caterpillar might increase its product prices to recover higher raw material costs. The stronger dollar could dent the currency advantage and have a negative impact on the company’s sales, profit, and margin.

Investors can hold Caterpillar indirectly by investing in the Invesco Dow Jones Industrial Average Dividend ETF (DJD), which has invested 2.4% of its portfolio in Caterpillar. The fund also provides exposure to IBM (IBM), 3M (MMM), and Boeing (BA) with weights of 4.8%, 2.7%, and 2.6%, respectively, as of July 31.

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