Markets
DE

Can Caterpillar (CAT) Retain Its Beat Streak in Q1 Earnings?

Caterpillar Inc.CAT is slated to report first-quarter 2018 results on Apr 24 before the opening bell. Notably, the mining and construction equipment behemoth has outpaced earnings and revenue estimates in all the quarters of 2017 and delivered a 101% improvement in earnings for the year. After suffering a 36% drop in earnings in fiscal 2016 due to weak end-user demand in most of the industries it serves, this recovery was made possible by improvement in the construction sector, pickup in Resource Industries as well as its disciplined cost-control efforts.

Consequently, investors are keen to know whether Caterpillar will be able to maintain the momentum in the first quarter of 2018 as well.

Given impressive results, the company's share price has outperformed the industry in the past year. The shares gained 64.6%, ahead of the industry's growth of 12.8%. An earnings beat will help the company sustain the price momentum.

Looking at the upbeat estimates for the both earnings and revenues for the first quarter, it seems likely that the company will deliver improved year-over-year earnings on both metrics. This is also supported by strong fourth-quarter projections for its segments - Machinery, Energy & Transportation which generates a major chunk of revenues and earnings. Notably, performance will be driven by its positive end markets namely construction, mining and energy.

Let's delve deeper and take a look at factors that might influence first-quarter results.

Caterpillar Inc. Price and EPS Surprise

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

Improved Markets will Drive Top-Line Growth

Per the Zacks Consensus Estimate, the Machinery, Energy & Transportation segment, which contributed approximately 95% of total revenues in fourth-quarter 2017, is expected to log year-over-year growth of 18% to $10.8 billion in the first quarter of 2018. We believe the company will witness growth in all its segments - Construction Industries, Resource Industries, Energy & Transportation. Also at fiscal 2017 end, Caterpillar's backlog was at $15.8 billion, up from $15.4 billion at third-quarter 2017 end, primarily driven by higher backlog in Resource Industries. This bodes well for performance in the to-be-reported quarter.

The Zacks Consensus Estimate for total sales of $11.6 billion for the first quarter indicates 18% growth from the prior-year quarter.

Caterpillar's Resource Industries' performance will drive growth in the first-quarter 2018. Sales are being driven by continued strong demand for aftermarket parts. Global economic momentum and increasing commodity prices is restoring miners' profitability and they are resuming capital spending. This bodes well for the segment. Per the Zacks Consensus Estimate, Resource Industries is anticipated to witness a 23% year-over-year growth to $2.1 billion.

The Construction Industries is expected to remain strong in first-quarter 2018 as China and other APAC countries will continue to drive growth owing to investments in infrastructure. In North America, continued improvement in residential and non-residential construction as well as revival in infrastructure demand will drive revenues.

For the Energy & Transportation segment, sales into Oil and Gas applications are likely to increase in the quarter, led by reciprocating engines for gas compression and well-servicing activity in North America. Sales to Transportation sector will benefit from recent acquisitions in rail services. The Zacks Consensus Estimates for the segment's revenues is at $3.9 billion, projecting 17% year-over-year growth.

Focus on Cost Control to Boost Profits

In September 2015, Caterpillar set upon significant restructuring and cost reduction initiative, with actions expected through 2018. Once fully implemented, the plan would lower annual operating costs by about $1.5 billion. In first-quarter 2018, revenue growth along with cost reduction will lead to an improved bottom-line as well.

For the quarter, the Zacks Consensus Estimate for Profit before Taxes for the Machinery, Energy & Transportation segment is pegged at $1.4 billion, a substantial improvement from the prior-year quarter's profit of $0.1 billion. This will be driven by a 49% rise in the Construction segment's operating profit to $946 million, as per the latest Zacks Consensus Estimates. Further, the Resource Industries segment is expected to report an operating profit of $264 million, an improvement of 67% over $158 million reported in the prior-year quarter. The Energy & Transportation segment is expected to report operating profit of $688 million, a rise of 25% from the prior-year quarter.

Further, the Zacks Consensus Estimate for earnings per share of $1.77 for the quarter reflects an improvement of 65% on a year-over-year basis.

Here is what our quantitative model predicts:

Caterpillar has the right combination of two main ingredients - a positive Earnings ESP and Zacks Rank #3 (Hold) or higher - which shows that it is likely to beat earnings in the to-be-reported quarter.

Zacks ESP: The Earnings ESP for Caterpillar is +4.07%. This is because the Most Accurate estimate of $2.20 is above the Zacks Consensus Estimate of $1.77. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: Caterpillar carries a Zacks Rank #2 (Buy), which combined with a positive ESP makes us reasonably confident of a positive earnings surprise.

Other Stocks Worth a Look

Here are a few other industrial products stocks worth considering as they too have the right combination of elements to post an earnings beat this quarter.

Axon Enterprise, Inc. AAXN has an Earnings ESP of +12.50% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here . Axon's shares have surged 90% in the past year.

The Earnings ESP for Deere & Company DE is +2.69%. It sports a Zacks Rank #1. Shares of Deere have gone up 38% in a year's time.

A. O. Smith Corporation AOS has an Earnings ESP of +0.96% and a Zacks Rank #2. Its shares have gone up 31% in a year's time.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Caterpillar Inc. (CAT): Free Stock Analysis Report

A. O. Smith Corporation (AOS): Free Stock Analysis Report

Deere & Company (DE): Free Stock Analysis Report

Axon Enterprise, Inc (AAXN): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

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


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

In This Story

DE AOS CAT AXON

Other Topics

Earnings Stocks

Latest Markets Videos

Zacks

Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at www.zacks.com.

Learn More