Skip to Content
Market Update

Caterpillar's Incremental Profitability Slips Sharply in 2Q

We expect higher incremental margins from here, driven by Cat's solid cost focus and continued volume increases, but it seems the recovery will prove lumpy.


After reviewing  Caterpillar's (CAT) second-quarter results, reported Friday, we plan to adjust our near-term assumptions to reflect management's increased guidance (which now also includes the completed acquisition of mining equipment manufacturer Bucyrus), but our long-term forecast is unchanged. We're maintaining our fair value estimate.

In the quarter, Cat enjoyed continued strong demand, with revenue in its core machine and engine business climbing 39% from the prior-year period. However, increased costs and continued headwinds from the Japan disaster earlier this year led to declining gross margins, both sequentially and year over year. As a result, although operating margins climbed to 11% from about 10% in last year's second quarter, the metric fell from the first quarter's strong 14%; incremental margins fell to about 17% from 28% in the immediately prior period (including some negative currency movements in the quarter, but excluding the late 2010 purchase of EMD). Management believes the negative effects from Japan are largely behind the company now, but we caution that competitor  Terex (TEX) also saw supplier price increases and component shortages during its second quarter, reported Thursday. We expect higher incremental margins from here, driven by Cat's solid cost focus and continued volume increases, but it seems the recovery will prove lumpy.

Adam Fleck does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.