uploads/2018/10/Caterpillar-Construction-Industries-Q3-2018-Post-1.png

What Drove Caterpillar’s Construction Industries Segment in Q3?

By

Updated

Caterpillar’s Construction Industries segment in Q3 2018

Caterpillar’s (CAT) Construction Industries segment is the company’s biggest revenue contributor. The segment had a revenue share of 42.10% in the third quarter. The segment’s revenue share fell by 0.7 percentage points on a YoY basis. The segment reported revenues of $5.68 billion in the third quarter, which implies an increase of 16.3% on a YoY basis. In the third quarter of 2017, the segment reported revenues of $4.89 billion.

Article continues below advertisement

The Construction Industries segment revenue grew primarily because of higher sales volume for construction equipment. On a geographical basis, North America reported the highest revenue growth of 22%. The increase in oil and gas activity and non-residential construction activity resulted in higher demand for the new equipment in the region. Asia-Pacific grew by 19% due to increased demand in China driven by the inventory increase, improved non-residential construction, and infrastructural activities. EMEA (Europe, Middle-East, and Africa) grew by 10% due to infrastructure activities in different countries. However, revenues in Latin America declined by 5% due to weakness in the construction activity.

Operating profit and margin

The Construction Industries segment reported a profit of $1.06 billion in the third quarter compared to $884.0 million in the third quarter of 2017, an increase of 19.7% YoY. The segment reported an operating profit margin of 18.6% in the third quarter of 2018 compared to 18.1% in the third quarter of 2017, an expansion of 50 basis points YoY. The segment’s profit and margin increased due to higher sales volume. However, the increase in raw material prices and freight costs had an adverse impact on profits and margins.

Outlook

The worry on China growth and the weakness in the construction activities in Latin America might pose a challenge to the segment’s revenue. Further, the strong dollar could hamper the segment’s revenue growth. On the other hand, the product price increase is expected to drive the segment’s growth.

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 5.6%, 3.3%, and 2.8%, respectively, as of October 23.

Advertisement

More From Market Realist