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Caterpillar (CAT) to Report Q2 Earnings: What's in Store?

Zacks Equity Research

Caterpillar Inc. CAT is scheduled to report second-quarter 2019 results on Jul 24, before the opening bell. The company beat earnings expectations in three of the trailing four quarters, with an average positive earnings surprise of 0.45%.

Which Way Are Q2 Estimates Headed?

The Zacks Consensus Estimate for second-quarter revenues is pegged at $14.52 billion, indicating an improvement of 3.66% from the year-ago quarter. The same for earnings stands at $3.12, suggesting growth of 5.05% from the prior-year reported figure. Notably, the consensus mark has remained unchanged over the past 30 days.

Caterpillar Inc. Price and EPS Surprise

Caterpillar Inc. Price and EPS Surprise

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

The upbeat estimates for the to-be-reported quarter signal that Caterpillar is likely to report 10th consecutive quarter of both top and bottom-line growth.

Shares of the company have declined 3.9% in a year, against the industry’s growth of 4.4%. Will the upcoming earnings release provide a boost to Caterpillar’s stock? Let’s delve deeper and analyze the factors that might influence the quarter’s results.

Factors at Play

Robust Backlog, Strong End-Markets to Drive Revenues

 At the end of first quarter 2019, Caterpillar’s order backlog was at $16.9 billion, a sequential improvement of $300 million aided by increase in Energy & Transportation and Construction Industries, partially offset by a lower backlog at Resource Industries. This is likely to aid the second-quarter’s top-line performance.

For the Machinery, Energy & Transportation segment, which contributes around 90% of the company’s total revenues, the Zacks Consensus Estimate for the second quarter of 2019 is pegged at $13.8 billion, indicating year-over-year improvement of 30%.
The Zacks Consensus Estimate for the Resource Industries segment’s sales for the April-June quarter is pegged at $2,431 million, suggesting year-over-year growth of 13%. 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 second-quarter revenues. Latin America will continue on its path of recovery but demand will remain relatively low. Though demand remains steady in EMEA, political and economic uncertainties will be a deterrent. However, the recent slowdown in in China will be a drag on revenues given that the country 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 $6,333 million for the to-be-reported quarter, suggesting a year-over-year growth of 3%.

For the Energy & Transportation segment, the Zacks Consensus Estimate for the segment’s sales is currently at $4,705 million, a marginal decline from $4,714 million reported in the year-ago quarter. 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. However, the recent volatility in oil prices and take away construction in the Permian will negatively impact demand for well servicing equipment in the June-ending quarter. 

Cost Reduction Efforts to Boost 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.

Nevertheless, Caterpillar has been undergoing significant restructuring and cost reduction initiatives lately which will buoy margins.  The second quarter of 2019 is anticipated to be no exception to the trend, as strong order flow, price hikes and 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 $2,389 million, up 12% from the $2,134 million reported in the prior-year quarter. The Resource Industries segment is anticipated to report an operating profit of $539 million, an improvement of 31% from the prior-year quarter figure of $411 million. However, the Energy & Transportation segment is expected to report operating profit of $998 million, suggesting a decline of 1% from the year-ago reported figure. The Zacks Consensus Estimate for the Construction segment’s operating profit is at $1,195 million, indicating growth of 4% from the prior-year quarter.

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 -0.27%.

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.

Stocks Poised to Beat Earnings Estimates

Here are a few Industrial Products stocks which you may consider as our model shows that these have the right combination of elements to post an earnings beat in their upcoming releases:

John Bean Technologies Corporation JBT has an Earnings ESP of +1.85% and a Zacks Rank of 1. The stock has appreciated 28% over the past year. You can seethe complete list of today’s Zacks #1 Rank stocks here.

AptarGroup, Inc. ATR has a Zacks Rank #2 and an Earnings ESP of +0.88%. The stock has gained 31% over the past year.

Sonoco Products Company SON, a Zacks Ranked #2 stock, has an Earnings ESP of +3.09%. The stock has moved up 20% in a year’s time.

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