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Why CAT’s Energy and Transportation Segment’s Margin Expanded

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Oct. 25 2018, Updated 11:32 a.m. ET

Energy and Transportation segment in Q3 2018

Caterpillar’s (CAT) Energy and Transportation segment accounted for 41.1% of total revenues in the third quarter. The segment’s revenue share fell by 1.3 percentage points on a YoY basis. The segment reported revenues of $5.55 billion in the third quarter, which implies an increase of 14.8% on a YoY basis. In the third quarter of 2017, the segment reported revenues of $4.84 billion.

The Energy and Transportation segment’s revenue grew due to higher sales volumes across the businesses segment with the exception of the industrial business. The oil and gas business increased by 28% driven by the demand for well servicing and gas compression applications. Higher oil prices have encouraged growth in onshore drilling activity, driving the segment’s growth. The power generation business grew by 23% driven by the increased engine applications in the North American and the Asian region. The industrial business witnessed weakness due to uncertainties in some of the Middle East countries. Finally, the transportation business volumes grew on acquisitions in the Asia and EMEA region along with the increase in rail traffic in North America.

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Profit and margin

The Energy and Transportation segment reported a profit of $973 million in the third quarter compared to $743.0 million in the third quarter of 2017, an increase of 31% YoY. The segment reported a profit margin of 17.5% compared to 15.4% in Q3 2017, an increase of 210 basis points YoY. The segment’s profit and margin improved primarily because of higher volumes though manufacturing cost and freight cost had an adverse impact.

Investors can hold Caterpillar indirectly by investing in the iShares U.S. Industrials ETF (IYJ), which has invested 2.1% of its portfolio in Caterpillar. The fund also provides exposure to Boeing (BA), Honeywell (HON), and General Electric (GE) with weights of 5.6%, 3.3%, and 3.2%, respectively, as of October 23.

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