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Market Update

Cat Enjoys Strong Revenue Growth, but Flat Profitability

The Bucyrus and EMD acquisitions weigh on operating profitability in 3Q, but we think both acquisitions will add materially to the bottom line over the coming quarters.

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 Caterpillar (CAT) reported solid third-quarter results Monday, and we plan to maintain our $101 fair value estimate. Machinery and engine revenue climbed nearly 44% year over year, largely because of higher unit volume (including continued dealer inventory restocking) and 11 percentage points of growth from the recent acquisition of mining equipment manufacturer Bucyrus.

However, operating profitability was essentially flat year over year and sequentially, stemming from the dilutive effects of the Bucyrus and EMD acquisitions; the firm posted just 11.7% in all-in incremental margins, a far cry from the high 20s enjoyed in this year's first quarter. But excluding the losses associated with these purchases, Cat's incremental margins climbed to 22% from a weak 18% in the second quarter, and we think both acquisitions will add materially to the bottom line over the coming quarters as they are fully integrated.

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