EUR 850.00 For Business Accounts Only

Morningstar | Caterpillar Delivers Solid Q1 Performance Despite Construction Equipment Market Share Loss in China

Wide-moat Caterpillar’s first-quarter performance demonstrated its continued ability to streamline operations and introduce innovative products. Its first-quarter adjusted earnings per share, or EPS, of $2.94 beat consensus of $2.86. Most notable during the quarter was the performance of its resource industries segment, which increased revenue 18.1% year over year and expanded its operating margin to 21.1% from 16.4%. Demand from miners and producers of aggregates was especially robust in the quarter. The segment’s deliveries in the Asia-Pacific region were particularly strong, with sales up 52% year over year. This contrasted with Caterpillar’s construction industries performance in China, which had flat sales despite a robust market for construction equipment. Data from the China Construction Machinery Association (CCMA) indicated that excavator sales in China were up 24% year over year in Q1. On the call, management conceded it lost market share as competitors engaged in aggressive pricing. Despite these developments, we are raising our fair value slightly to $169 from $168 because of the time value of money, while our core assumptions remain unchanged.

In Caterpillar’s construction industries segment, revenue increased 3% year over year, with operating margins declining to 18.5% from 19.7% because of higher material, labor, and freight costs. Strong North American infrastructure spending helped drive results. In Asia, outside China, Caterpillar continues to benefit from healthy infrastructure investment.

For its energy and transportation segment, sales were approximately flat year over year with operating margin declining to 16.1% from 16.7% in the first quarter of 2018. Performance in the quarter was hit by the timing of turbine deliveries. However demand for power generation equipment, including large diesel engines, was strong. The backlog in the segment increased, driven by rail-related services that we expect to pick up later in 2019.

Despite the weakness in some markets and latest market share decline in China for its construction industries segment, we are confident about Caterpillar’s larger strategy of driving demand for its products through innovation while streamlining its manufacturing operations. The latest additions to its product lineup include excavators with semi-autonomous features, hybrid power trains for off-highway applications, an electric-drive dozer, and a new Cat app that allows customers to easily track machine operating data. Introducing features that improve customer value is an excellent way to combat competition, even in markets such as China where upfront pricing drives purchasing decision. In the larger context, increasing product sophistication and connectivity offers opportunities to increase service revenues, which management highlighted on the first-quarter earnings call. As Caterpillar is increasing the number connected assets at a rate of approximately 30% annually, it now has over 850,000 pieces of such equipment worldwide. We believe Caterpillar’s continued focus on telematics and data analytics will differentiate its products from lower-cost alternatives, allowing it to cement its leadership position in the global heavy equipment marketplace despite increasing competition.