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Caterpillar Stock Remains Unconvincing Prior to Q2 Earnings

Josh Enomoto

If there’s any one company that should benefit from President Trump’s administration, it’s Caterpillar (NYSE:CAT). Although several organizations have flourished under the general Republican ethos of less government restrictions, Trump himself routinely mentioned CAT stock on the campaign trail.

Caterpillar Stock Remains Unconvincing Prior to Q2 Earnings

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For him, it was a great juxtaposition for his somewhat anachronistic world view. On one hand, we have Caterpillar stock, an icon of American industry, but one that has faded under liberal policies. And on the other hand, we have the “bad guys,” or Japanese firms like Komatsu (OTCMKTS:KMTUY).

These foreign companies are out on the prowl, stealing American jobs through unfair trade platforms and currency manipulation. Thus, the message was that the CAT stock price had nowhere to go but down.

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Of course, nuance has never been the President’s strong suit, or at least he doesn’t reveal much of it publicly. That said, his fiery brand of conservatism obviously worked. Enough Americans bought into the us-versus-them message, handing the former real estate mogul an unexpected victory. What’s more, he has done a great job for Caterpillar stock.

Since election day Nov. 8, 2016, the CAT stock price has gained nearly 73%. Although that’s nothing to write home about considering the time length, it’s a remarkable turnaround. Following an initial recovery from the 2008 financial crisis, Caterpillar stock entered a choppy, but largely sideways consolidation pattern.

The second half of 2014 devolved into an ugly downtrend. In the following year, nothing changed.

Thus, Trump’s election gave CAT stock a fundamental boost. But is there enough juice left for a repeat performance following a year of lackluster performance?

CAT Stock Needs a Compelling Earnings Report

On Wednesday before the opening bell, Caterpillar is on schedule to release its second quarter of 2019 earnings report. While all quarterly fiscal performances are important, this one could be especially crucial to the CAT stock price. For the trailing 52-weeks, shares haven’t gone anywhere.

Clearly, investors haven’t gotten over the electoral narrative that first skyrocketed Caterpillar stock. Now, they want to see substance. Can management deliver the goods?

For Q2, covering analysts peg consensus earnings-per-share at $3.12. This figure is just slightly toward the bullish end of the estimate spectrum, ranging from $2.99 to $3.25. In the year-ago quarter, Caterpillar produced an EPS of $2.97 against a consensus $2.73 target.

On the revenue front, analysts anticipate a consensus haul of $14.4 billion. This is much more aligned with the optimistic end of estimates, which range from $13.5 billion to $14.9 billion. In Q2 2018, the industrial-equipment maker rang up $14 billion.

Can Caterpillar produce a beat? Based on historical performances in the Trump era (Q1 2017 through Q1 2019), I don’t think a beat is unreasonable. For instance, if Q2 sales comes in as forecast, it would represent a 2.8% year-over-year lift. During Trump’s administration, the average YOY sales growth is 16.4%.

CAT stock versus Caterpillar revenue

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However, I believe that Caterpillar stock will need much more than a solid beat to interest prospective buyers. During the Obama administration, quarterly revenue peaked at $14.24 billion in Q4 2014 before immediately tumbling thereafter.

In the Trump years, Caterpillar revenue has peaked at $14.34 billion. It’s an improvement over Q4 2014’s sales haul, but not by much. And, overall, the company has only brought revenue to its last high point, and not above it. That’s got to be concerning for stakeholders of CAT stock.

Caterpillar Stock Is An “Avoid” Prior to Q2 Earnings

Interestingly, Zacks Equity Research doesn’t predict that CAT stock will produce an earnings beat for Q2. The research firm uses various proprietary mechanisms to forecast which companies are likely to bring home the bacon. Apparently, Caterpillar isn’t one of them.

Before you call me a hater, I don’t think it’s all bad news for the company. Certainly, speculators can gamble on certain bullish subsegments, such as mining. Recently, gold and silver prices have skyrocketed, which draws positive interest to the mining industry.

However, that’s just one segment. Overall, I don’t like the lack of substantive progress that Caterpillar has made. In the nine quarters of the Trump administration, the company has rang up $113.7 billion in top-line sales. In the nine quarters prior to Trump, Caterpillar generated $99.8 billion.

But here’s the thing: the $99.8 billion was during a downtrend. The $113.7 billion, though, was during an uptrend. And at just a 14% increase during the Trump administration, it’s nothing to write home about. So, unless you feel there’s a compelling driver here, I’d sit Caterpillar stock on the sidelines.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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