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Morningstar | Caterpillar Grows Revenue 19%, Achieves Impressive 16.2% Operating Margin; Increasing Our FVE. See Updated Analyst Note from 23 Oct 2018

Caterpillar delivered record third-quarter earnings per share of $2.88 and sales rose 19% to $12.7 billion with significant growth across all three manufacturing segments. Operating margin increased to 16.2%, up 410 basis points from the prior year, as Caterpillar’s operating and execution model continued to reap benefits. Management maintained its full-year adjusted profit per share estimate of $11.00 to $12.00 while slightly raising 2018 GAAP earnings guidance to $10.65-$11.65 from $10.50-$11.50. The company repurchased another $750 million in shares in addition to contributing $1 billion to its pension. We maintain our wide moat, stable moat trend ratings.

Overall, we were impressed with Caterpillar’s performance during the quarter.  Moreover, prospects for the fourth quarter and beyond appear very positive to us. We increased our fair value estimate to $186 from $178, and believe the recent sell-off presents an attractive buying opportunity.

As tariffs are an ongoing concern for investors, management clarified that tariff-related costs for the second half of the year would be at the lower end of the $100 million-$200 million range provided in the previous quarter. Material costs were up approximately 2% during quarter due to increased steel prices and tariff impacts. Elevated freight expenses continued to affect input costs, albeit modestly.

Product innovation was a key theme during the quarter as the company continued to deploy autonomous solutions and automation technology. The company also recently unveiled a series of mini-excavators that will appeal to a broader customer base.

Resource industries produced the greatest increase in revenue with a 35% year-over-year gain. Operating margin for the segment was a healthy 15.7%, up from 11.6% in the prior year. Much of the gain can be attributed to healthy economic growth and continued global infrastructure investment. While some mining customers were replacing existing equipment, many continue to focus on improving the productivity of their existing fleets.

Construction industries revenue increased across all geographic regions except for Latin America, producing 16% year-over-year growth. Strong sales in North America drove overall segment revenue with significant activity in oil and gas-related industries as well as nonresidential construction. Operating margin was 18.6% compared with the prior year’s 18.1%.

Energy and transportation revenue were up 15% from the prior-year period. Segment margins improved to 17.5% from 15.5% in the year-ago quarter. On-shore gas and oil activity was strong, but offshore oil and gas continued to be sluggish, while power generation showed pockets of growth with strong sales of reciprocating engines to data centers and power plants.