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Stock Analyst Update

Caterpillar Defies Trade War Worry With Strong Quarter

We are maintaining our fair value estimate for the wide-moat firm after a strong quarter.


Following wide-moat  Caterpillar’s (CAT) impressive first-quarter results, we are maintaining our $125 fair value estimate. First-quarter 2018 adjusted EPS rose over 120% from the prior-year period to $2.82, beating consensus estimates by $0.69. As we expected, Caterpillar’s performance was driven on both the top and bottom lines. Activity strengthened across all three of its manufacturing divisions despite other analyst concerns over trade wars effecting sales. (See our recent note "Tax Reform and a Solid Economy Support the Heavy Equipment Sector Despite U.S. Steel Tariffs.")

Caterpillar increased manufacturing segment revenue 33% to $12.2 billion compared with the prior year’s quarter. As discussed in previous notes, the industry has been in growth mode thanks to a combination of U.S. tax reform, strong economic activity, and positive commodity price trends. Caterpillar’s resource industries and energy and transportation segments clearly demonstrate this point, as both segments increased revenue 32% to $2.2 billion, and 27% to $4.3 billion, respectively (excluding intersegment revenue). Resource industries improved margins around 760 basis points to 17.1%, and energy and transportation improved margins around 400 basis points to 20.4%, with the latter’s margins not seen since the first quarter of 2015. Also taking advantage of the positive industry tailwinds, construction industries increased revenue 38% to $5.7 billion thanks to strong dealer restocking inventory activity ahead of the spring selling season.

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Nick Mokha does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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