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Caterpillar (CAT) to Report Q3 Earnings: What's in Store?

Zacks Equity Research

Caterpillar Inc. CAT is scheduled to report third-quarter 2019 results on Oct 23, before the opening bell. The company beat earnings expectations in two of the trailing four quarters, with an average negative earnings surprise of 4.79%.

Which Way are Q3 Estimates Headed?

The Zacks Consensus Estimate for the third-quarter earnings is currently pegged at $2.83, indicating a decline of 1.05% from the prior-year quarter. The figure has also moved south by 2% 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

 

Shares of the company have fallen 2.7% in a year, compared with the industry’s decline of 6.0%. Will the upcoming earnings release provide a boost to Caterpillar’s stock? Let’s delve deeper and analyze the factors that are likely to have influenced the quarterly results.



Factors at Play

Trade tensions with China and waning global demand seems to have taken a toll on the U.S manufacturing sector. Per the Institute for Supply Management’s latest report, the U.S Purchasing Managers’ Index (PMI) declined to 47.8% in September 2019 — the worst reading in a decade. This follows readings of 49.1% in August and 51.2% in July. This indicates a contraction in the manufacturing sector. This is anticipated to get reflected on Caterpillar’s third quarter revenue results.

The Zacks Consensus Estimate for third-quarter revenues is $13.38 billion, suggesting a decline of 0.94% from the prior-year quarter.

Material cost inflation, thanks to the imposition of tariffs last year, is likely to have impacted Caterpillar’s margins. However, the company’s pricing actions and significant restructuring, and cost reduction initiatives are expected to get reflected on the company’s third-quarter results.

How Will The Segments Fare?

For the Machinery, Energy & Transportation segment, which contributes around 90% of the company’s total revenues, the Zacks Consensus Estimate for the third quarter of 2019 is pegged at $12.8 billion, on par with the prior-year quarter.
 
The Zacks Consensus Estimate for the Resource Industries segment’s sales for the third quarter is pegged at $2,751 million, suggesting year-over-year growth of 8%. Miners are resumed capital spending in the second quarter, a trend that most likely continued in the third quarter. Further, the segment’s third-quarter top line is likely to reflect continued strong demand for aftermarket parts on account of higher machine utilization levels.

In North America, construction equipment sales fell in September for the third straight month. Residential and commercial construction spending have been weak as well. This overall weakness might have affected the Construction segment’s sales in the third quarter. On top of this, a muted China market is likely to have weighed on revenues given that it represents about 10% to 15% of the segment’s sales. The Zacks Consensus Estimate for the Construction segment’s sales is projected at $6,568 million for the to-be-reported quarter, suggesting a year-over-year decline of 1.5%.

For the Energy & Transportation segment, the Zacks Consensus Estimate for sales is currently at $4,439 million, indicating a decline of 3% from $4,577 million reported in the year-ago quarter. The Transportation sector’s sales are likely to have benefited from recent acquisitions in rail services. Power Generation sales have been improving after a multi-year downturn, a trend that most likely continued in the to-be-reported quarter. However, sales for industrial applications are likely to have been impacted by slow global economic conditions.  

For the to-be-reported quarter, the Zacks Consensus Estimate for operating profit for the Machinery, Energy & Transportation segment is pegged at $2,163 million, up 5% from the $2,064 million reported in the prior-year quarter. The Resource Industries segment is anticipated to report an operating profit of $507 million, an improvement of 23% from the prior-year quarter. However, the Energy & Transportation segment is expected to report operating profit of $918 million, suggesting a decline of 6% from the year-ago reported figure. The Zacks Consensus Estimate for the Construction segment’s operating profit is at $1,057 million, flat compared with the prior-year quarter.

What Our Model Indicates

Our proven model does not conclusively predict 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 uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
 
Earnings ESP: Caterpillar’s Earnings ESP is -3.69%.

Zacks Rank: Caterpillar currently carries a Zacks Rank #5 (Strong Sell).

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 +0.55% and a Zacks Rank of 3. The stock has appreciated 28% over the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Sealed Air Corporation SEE has a Zacks Rank #3 and an Earnings ESP of +1.59%. The stock has gained 28% over the past year.

W.W. Grainger GWW, a Zacks Ranked #3 stock, has an Earnings ESP of +0.45%. The stock has moved up 1% in a year’s time.

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