U.S. Markets closed

Caterpillar October Sales Rise 19%: Machinery Stocks in Focus

Zacks Equity Research

Caterpillar Inc. CAT reported a 19% rise in global retail sales for the three months ended October 2017, marking the fastest pace since 2012. This was driven by improvement across all regions with construction, mining and energy reporting the best performances year to date.

The solid momentum in retail sales, strong third-quarter results and upbeat guidance are adding to the evidence that the company is recovering. This instils optimism in the broader machinery sector as Caterpillar has been dominating the global manufacturing industry for long, courtesy of its size and scope of operations.

Caterpillar Fires on All Cylinders

In October, Caterpillar’s performance was driven a 46% increase in Asia Pacific sales. The region has been a consistent contributor for Caterpillar since it posted the first positive reading in August 2016. Latin America registered growth of 24% in October, showing a substantial pick up from the 6% rise in the preceding month. Europe, Africa and Middle East (EAME) sales were up 19% and North America sales rose 7%. Notably, Latin America, EAME and North America scaled peak levels in the month, while Asia Pacific nominally lagged the high of 49% recorded in May.

Resource Industries segment delivered its best year-to-date performance with 18% growth in October sales, led by a 65% rise in EAME sales. Asia Pacific and Latin America reported sales growth of 5% and 4%, respectively. North America disappointed with a 2% drop, which however reflected an improvement from the high-single-digit declines experienced so far.

Sales growth in the Construction Industries segment also scaled a high at 20%. Sales advanced a robust 58% in Asia Pacific and 35% in Latin America. North America and EAME sales rose a respective 10% and 7%. Sales in the Energy & Transportation segment rose to the highest this year at 23%, highlighting a massive improvement from the 5% rise in September.

Growth was led by sales to the Transportation sector, which reported a 51% rise. Sales in the Industrial sector rose 37%, closely followed by the Oil and Gas sector, wherein sales improved 27%. Sales to the Power Generation sector edged up 3%.

Caterpillar Stages a Comeback

Caterpillar, which had been affected by a weak mining industry in the past few years, is finally showing signs of recovery. The pickup in October sales comes on the back of Caterpillar’s upbeat third-quarter results wherein adjusted earnings per share surged 129% and revenues improved 24.6%, building on the momentum which started in the first half of 2017.

The better-than-expected performance was driven by strong demand for construction equipment in North America, robust sales in China, improvement in other markets as well as disciplined cost control. Caterpillar raised the revenue guidance for the third time to $44 billion and projects earnings at $6.25. The mid-point of the revenue and earnings guidance reflects a year-over-year growth of 14% and 83%, respectively.

On a year-to-date basis, Caterpillar has gained 47.2%, outperforming the industry’s rally of 45.6% and the S&P 500’s 16.9%.

Brighter Prospects Ahead

Donald Trump’s plans of spending big in infrastructure will boost Caterpillar’s revenues since it is expected to play a major role in the national infrastructure plan. Meanwhile, higher sales in Asia Pacific (particularly China) and North America driven by an uptick in pipeline construction and improved residential and non-residential construction will fuel growth in Construction Industries segment.

In China, the construction industry is improving on rising government spending. In 2017, the 10-ton-and-above excavator industry in the nation is expected to more than double from last year.

Resource Industries segment will gain on higher aftermarket parts sales. Energy & Transportation will be driven by improved sales of engines into industrial applications and strength in onshore North America oil and gas and transportation. Further, the ongoing efforts to reduce costs will boost Caterpillar’s margins.
Reflecting the solid prospects, all the 10 estimates available for both 2017 and 2018 for Caterpillar have moved up in the past 30 days. The earnings estimates for 2017 climbed 22% while that for 2018 moved up 13%. The Zacks Consensus Estimate for 2017 and 2018 earnings reflects growth of 87.02% and 19.22%, respectively.

The stock has an estimated long-term earnings growth rate of 10.33%. Caterpillar beat the Zacks Consensus Estimate in the trailing four quarters, delivering a positive average earnings surprise of 53.06%.

Machinery Stocks Poised for Growth

Caterpillar’s stellar run in the market and solid prospects have brought the spotlight back on machinery stocks. The company falls under the Zacks Manufacturing - Construction and Mining industry, which currently carries a Zacks Industry Rank of 9 — a testimony to the fact that the industry is in fine shape. The favorable rank places the industry in the top 4% of the 256 groups enlisted.

Thus, investing in machinery stocks makes perfect sense at this point.

Apart from Caterpillar, which flaunts a Zacks Rank #1 (Strong Buy), we suggest other Zacks #1 or 2 (Buy)-ranked machinery stocks backed by positive earnings estimate revisions and price appreciation.

H&E Equipment Services, Inc. HEES is one of the largest integrated equipment services companies in the United States focused on heavy construction and industrial equipment. It carries a Zacks Rank #2. The company has a positive average earnings surprise of 34.66% for the trailing four quarters.

The Zacks Consensus Estimate for earnings has gone up 44% for 2017 and 12% for 2018. H&E Equipment Services has expected long-term growth rate of 15.55%. The stock has gained 46.4% year to date.
The Manitowoc Company, Inc. MTW provides engineered lifting equipment for the construction industry worldwide and carries a Zacks Rank #2. The company has a positive average earnings surprise of 139.10% for the last four quarters.
The earnings estimate for 2017 has risen from a loss of 14 cents to a loss of 4 cents over the last 30 days. The estimates for 2018 moved up 86% to 13 cents. The stock has rallied 65.2% year to date.

Terex Corporation TEX is a global manufacturer of lifting and material processing products. The company has delivered a positive average earnings surprise of 135.92% in the last four quarters and flaunts a Zacks Rank #1. Terex has an expected long-term growth rate of 11.25%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The earnings estimates for 2017 and 2018 have both moved up 11%. The stock has gained 41.5% year to date, ahead of the S&P 500’s rally of 15.6%.

Komatsu Ltd. KMTUY engages in the development, manufacture, marketing, and sale of various industrial-use products and services globally. It sports a Zacks Rank #1. The earnings estimates for 2017 moved up 16% while that of 2018 rose 10%. Komatsu has an expected long-term growth rate of 16.20%. The stock has gained 44.8% year to date.

Today's Stocks from Zacks' Hottest Strategies

It's hard to believe, even for us at Zacks. But while the market gained +18.8% from 2016 - Q1 2017, our top stock-picking screens have returned +157.0%, +128.0%, +97.8%, +94.7%, and +90.2% respectively.

And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - Q1 2017, the composite yearly average gain for these strategies has beaten the market more than 11X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.

See Them Free>>

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
Terex Corporation (TEX) : Free Stock Analysis Report
Caterpillar, Inc. (CAT) : Free Stock Analysis Report
Manitowoc Company, Inc. (The) (MTW) : Free Stock Analysis Report
Komatsu Ltd. (KMTUY) : Free Stock Analysis Report
H&E Equipment Services, Inc. (HEES) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research