Caterpillar (CAT) to Report Q1 Earnings: What's in Store?

Caterpillar Inc. CAT is scheduled to report first-quarter 2019 results on Apr 24 before the opening bell. Notably, the mining and construction equipment behemoth delivered a year-over-year improvement of 18% and 11% in earnings and revenues, respectively, in fourth-quarter 2018.

However, in the last reported quarter, the company’s top and bottom line both missed the respective Zacks Consensus Estimate. Nevertheless, Caterpillar outpaced earnings estimates in three of the trailing four quarters, recording an average positive earnings surprise of 7.98%. Consequently, investors are keen on finding out whether Caterpillar will be able to deliver a beat in the to-be-reported quarter.
Looking at the upbeat estimates for the both earnings and revenues for the first quarter of 2019, it seems that the company is likely to deliver year-over-year improvement on both metrics. Let’s delve deeper and analyze the factors that might influence the first-quarter’s results.

Caterpillar Inc. Price and EPS Surprise


Caterpillar Inc. Price and EPS Surprise

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

Strong Order Growth to Drive Revenues
At the end of 2018, Caterpillar’s order backlog was at $16.5 billion, an improvement of $700 million year over year aided by increase in Energy & Transportation and Construction Industries. This bodes well for performance in the to-be-reported quarter. The Zacks Consensus Estimate for total sales of $13.4 billion for the first quarter indicates growth of 4.5% from the prior-year reported quarter.
For the Machinery, Energy & Transportation segment, which contributed approximately 90% of total revenues in 2018, the Zacks Consensus Estimate for the first quarter of 2019 is pegged at $12.8 billion, suggesting year-over-year improvement of 6%.
For the Resource Industries segment, the Zacks Consensus Estimate for sales for the first quarter of 2019 is pegged at $2,556 million, indicating year-over-year growth of 16%. Continued strong demand for aftermarket parts on account of higher machine utilization levels will drive sales. Further, miners are resuming capital spending which will support revenues for the segment.
In the Construction Industries segment, continuous improvement in residential and non-residential construction in North America will drive revenues. However, the recent slowdown in in China is a concern given that China represents about 10% to 15% of the construction industry segment’s sales. The Zacks Consensus Estimate for the Construction segment’s sales is projected at $5,869 million for the to-be-reported quarter, suggesting a year-over-year rise of 4%.
For the Energy & Transportation segment, sales to the Oil and Gas sector are likely to have increased in the to-be-reported quarter, aided by stable oil prices. Sales for industrial applications are likely to have remained strong, 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 and the momentum is likely to have sustained in the to-be-reported quarter. The segment’s sales are expected to grow 22% year over year to $5,229 million in the first quarter of 2019.
Cost Reduction Efforts to Sustain Margins
Material cost inflation will continue to affect Caterpillar’s margins. 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 8.3% over the past year, compared with the industry’s decline of 10.8%.
Caterpillar has been undergoing significant restructuring and cost reduction initiatives which have been benefiting margins.  The first quarter of 2019 is anticipated to be no exception to the trend, as strong order flow, price hikes along with savings from cost reduction will help counter the impact of higher costs.
For the to-be-reported quarter, the Zacks Consensus Estimate for operating profit for the Machinery, Energy & Transportation segment is pegged at $2,214 million, up 8% from the $2,055 million reported in the prior-year quarter. The Resource Industries segment is expected to report an operating profit of $445 million, an improvement of 18% from the prior-year quarter figure of $78 million. Further, the Energy & Transportation segment is anticipated to report operating profit of $930 million, suggesting an improvement of 6% from the year-ago reported quarter. However, the Zacks Consensus Estimate for the Construction segment’s operating profit is at $1,108 million, indicating a decline of 1% from the prior-year quarter.

The Zacks Consensus Estimate for Caterpillar’s earnings is currently pegged at $2.84 for the first quarter of 2019, indicating an improvement of 0.71% on a year-over-year basis.
What Our Model Indicates
Our proven model does not conclusively show a beat for Caterpillar this earnings season. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below. You can see the complete list of today’s Zacks #1 Rank stocks here.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP: Caterpillar’s Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -2.82%.

Zacks Rank: Caterpillar currently carries a Zacks Rank #3.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

Other Stocks to Consider
Here are few companies in the Industrial Products sector that you may want to consider, as our model shows these have the right combination of elements to post an earnings beat this quarter:

Chart Industries, Inc. GTLS has an Earnings ESP of +8.66% and a Zacks Rank #1.

Silgan Holdings Inc. SLGN has an Earnings ESP of +1.32% and a Zacks Rank #2.

Rockwell Automation, Inc. ROK has an Earnings ESP of +1.13% and a Zacks Rank #3.

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