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Will Caterpillar (CAT) Retain Earnings Beat Trend in Q4?


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Caterpillar Inc. CAT is slated to report fourth-quarter 2018 results on Oct 28 before the opening bell. Notably, the mining and construction equipment behemoth delivered a year-over-year improvement of 47% and 18% in earnings and revenues, respectively, in the third quarter of 2018. Both the top and bottom line beat the Zacks Consensus Estimate. Continued strength in many of its end markets and persistent focus on cost control aided results. This marked the company's seventh consecutive quarter of both top and bottom-line growth, following a string of dismal performances for four years.

Notably, Caterpillar outpaced earnings estimates in the trailing four quarters, recording average positive earnings surprise of 17.10%. Consequently, investors are keen on finding out whether Caterpillar will be able to maintain the momentum in the fourth quarter of 2018 as well.

Looking at the upbeat estimates for the both earnings and revenues for the fourth quarter, it seems likely that the company will deliver year-over-year improvement on both metrics. This is also supported by strong fourth-quarter projections for its Machinery, Energy & Transportation which generates a major chunk of revenues and earnings.

Caterpillar Inc. Price and EPS Surprise

Caterpillar Inc. Price and EPS Surprise

Caterpillar Inc. price-eps-surprise | Caterpillar Inc. Quote

Let's delve deeper and analyze the factors that might influence fourth-quarter results.

Strong Order Growth Will Drive Revenues

At the end of third-quarter 2018, Caterpillar's order backlog was at $17.3 billion, an improvement of $1.9 billion year over year aided by increase at in segments. This bodes well for performance in the to-be-reported quarter. The Zacks Consensus Estimate for total sales of $14.3 billion for the fourth-quarter indicates growth of 15.8% from the prior-year quarter.

Per the Zacks Consensus Estimate, the Machinery, Energy & Transportation segment, which contributed approximately 94% of total revenues in third-quarter 2018, is expected to log year-over-year growth of 12% in revenues to $13.7 billion in the fourth quarter of 2018.

For the Resource Industries segment, the Zacks Consensus Estimate for sales is pegged at $2,786 million, a projected year-over-year growth of 26%. Sales will be driven by continued strong demand for aftermarket parts. Further, miners are resuming capital spending which bodes well for the segment.

In the Construction Industries segment, continued improvement in residential and non-residential construction in North America will drive revenues. However, the recent slowdown in excavator sales in China is a concern. The Zacks Consensus Estimate for the Construction segment's sales are projected at $5,981 million for the to-be-reported quarter, an expected year-over-year drop of 12%.

For the Energy & Transportation segment, sales to the Oil and Gas sector is likely to increase in the quarter, aided by stable oil prices . Sales for industrial applications will remain robust, primarily backed by improving global economic conditions and higher end-user demand across most applications. Sales to the Transportation sector will benefit primarily from recent acquisitions in rail services. Power Generation sales are improving after a multi-year downturn. The segment's sales are expected to grow 22% year over year to $5,726 million in the to-be-reported quarter.

Poised to Deliver Improved Results Despite Inflated Costs

Material cost inflation will continue to affect Caterpillar's margins. The impact of recently imposed tariffs was about $40 million in the third quarter of 2018 and is likely to dent its fourth-quarter margins as well. The company is also witnessing higher freight rates owing to strained capacity in the trucking industry, less efficient freight loads, and expedited freight as it continues to ramp production to meet increased demand. 

Given these concerns, the company's share price has slumped 20.3% over the past year while the  industry  witnessed a decline of 23%. 

Nevertheless, Caterpillar has been undergoing significant restructuring and cost reduction initiatives which have been benefiting margins.  In fact, the fourth quarter is anticipated to be no exception to the trend. Consequently, strong order flow along, savings from cost reduction and pricing hikes will help counter the impact of higher costs.

For the to-be-reported quarter, the Zacks Consensus Estimate for Profit before Taxes for the Machinery, Energy & Transportation segment is pegged at $2,208 million, double the $1,091 million reported in the prior-year quarter. This can be attributed to a rise of 25% in the Construction segment's operating profit to $1,050 million, per the Zacks Consensus Estimate.  Further, the Resource Industries segment is expected to report an operating profit of $427 million, a substantial improvement from the prior-year quarter figure of $209 million. The Energy & Transportation segment is anticipated to report operating profit of $1,068 million, a rise of 21% from the year-ago quarter.

The Zacks Consensus Estimate for Caterpillar's earnings is currently pegged at $2.99 for the fourth quarter. The estimate reflects an improvement of 38.4% on a year-over-year basis.

What Our Model Indicates

Our proven model suggests that Caterpillar is likely to beat estimates in the quarter to be reported as it has the right combination of two key ingredients. A stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. 

You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is +0.30%. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise.

Zacks Rank: Caterpillar has a Zacks Rank #3, which, when combined with a positive ESP, makes us confident o f earnings beat.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Other Stocks to Consider

Here are some other few stocks worth considering as these too have the right combination of elements to post an earnings beat this quarter.

Heritage-Crystal Clean, Inc. HCCI has an Earnings ESP of +1.12% and a Zacks Rank #2. The company's shares have been up 12% in the past year. You can see the complete list of today's Zacks #1 Rank stocks here .

Cintas Corporation CTAS has an Earnings ESP of +4.87% and a Zacks Rank #2. The stock has gained 12% in a year's time.

HD Supply Holdings, Inc. HDS has an Earnings ESP of +4.87% and a Zacks Rank #2. Its shares have gained 3% in the past year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.





This article appears in: Investing , Business , Earnings , Stocks
Referenced Symbols: CTAS , CAT , HCCI , HDS




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