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Industrial Stocks' Q3 Earnings Due on Oct 23: CAT, PNR & IEX

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Industrial Stocks' Q3 Earnings Due on Oct 23: CAT, PNR & IEX

With industrial production rising at an annual rate of 3.3% in Q3, let's see how industrial stocks - Caterpillar (CAT), Pentair (PNR) and IDEX (IEX) - are expected to fare in the quarter.

The earnings season has kicked off with 84 S&P 500 members, accounting for 22.3% of the index’s total market capitalization, having reported financial numbers. Total earnings for these companies rose 19.2% year over year on 8.4% higher revenues, with 82.1% beating EPS estimates and 61.9% surpassing top-line expectations. According to the latest Earnings Preview, overall earnings for the S&P 500 companies are expected to be up 19.2% on 7.2% growth in revenues this season. 


Industrial Sector on Growth Path


Industrial Products is one of the 10 sectors that are expected to record double-digit earnings growth this quarter. According to our latest projections, the sector’s earnings are on track to rise 18.7% year over year in third-quarter 2018 on the back of 7.4% rise in revenues.


Driving Factors for the Sector 


Industrial production is one of the leading economic indicators for industrial stocks. U.S. industrial production rose 0.3% in September, following 0.4% growth in August and 0.3% rise in July. Overall, for the third quarter, industrial production improved at an annual rate of 3.3% — marking its fourth consecutive quarterly increase. 


Also, per the Institute for Supply Management’s latest report, Purchasing Managers’ Index for September rose 59.8% — exhibiting strong growth in manufacturing for the 25th consecutive month. This follows a reading of 61.3 in August and 58.1 in July. The upbeat performance continues to be led by strong production output and continued strength in new orders, signaling strong economic momentum. Despite manufacturers remaining concerned about the impact of tariffs, demand remains strong on the back of steadily rising wages, low tax rates and robust labor market conditions.


These strong data numbers are an indication that the sector is on a firm footing. Ongoing momentum in new orders, strong housing and commercial construction markets, growth in job additions, positive consumer confidence and the Trump administration’s economic policies such as tax cuts bode well for the sector.


It will be interesting to see how some of the industrial companies fare when they release third-quarter numbers on Oct 23.


Being the world's largest manufacturer of construction and mining equipment, Caterpillar, Inc. CAT is a leader in the industrial product sector. The company delivered year-over-year improvement in both the top and bottom lines in the last reported quarter, thanks to improved end-user demand across all regions and most end markets as well as its incessant efforts to cut down costs. 


Consequently, all eyes will be on the behemoth to see if it can repeat the feat when it reports earnings before the opening bell. Notably, Caterpillar has an impressive earnings surprise history beating estimates in each of the trailing four quarters with a positive average surprise of 31.79%.


Caterpillar Inc. Price and EPS Surprise


Caterpillar Inc. Price and EPS Surprise

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

The Zacks Consensus Estimate for Caterpillar’s earnings is currently pegged at $2.83 for the third quarter, which reflects an improvement of 45% on a year-over-year basis. Revenues for the quarter are pegged at $13.2 billion, projecting 16% growth.

In the third quarter, the company is likely benefit from solid momentum across all of its segments. The Resource Industries segment’s sales will gain from strong demand for aftermarket parts as well as pickup in miners’ capital spending. The Construction Industries will gain from investments in infrastructure as China and other APAC countries and improvement in residential and non-residential construction and infrastructure demand in North America.


For the Energy & Transportation segment, sales to the Oil and Gas sector are likely to increase in the quarter, led by reciprocating engines for gas compression and well-servicing activity in North America. Sales to the Transportation sector are likely to benefit from recent acquisitions in rail services. Further, cost savings from recent enhanced restructuring actions will boost margins.


Our proven model shows that Caterpillar is likely to beat earnings this quarter. This is because the company has the right combination of two key ingredients — a positive Earnings ESP (the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate) and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). 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.


Caterpillar currently has a Zacks Rank #3 and an Earnings ESP of +1.06%. (Read more: Caterpillar to Report Q3 Earnings: What's in the Offing?)


Pentair plc PNR, which delivers industry-leading products, services and solutions for its customers' diverse needs in water and other fluids, thermal management and equipment protection, will report quarterly results before the market opens. In the last reported quarter, it reported year-over-year improvement in both its top and bottom lines.


The company surpassed the Zacks Consensus Estimate in three of the trailing four quarters and missed in the other, delivering an average positive surprise of 2.5%.


Pentair plc Price and EPS Surprise


Pentair plc Price and EPS Surprise

Pentair plc price-eps-surprise | Pentair plc Quote

The Zacks Consensus Estimate for Pentair’s third-quarter earnings is at 52 cents, projecting year-over-year decline of 45%. Revenues for the quarter is at $700 million, indicating a 43% fall.

Pentair’s focus on investments, including technology upgrades, digital marketing campaigns, incremental sales resources and dealer tools will drive results in the September quarter. However, results will likely be impacted by tariffs. Though the company has implemented price increases in the quarter under review, the benefit will not be realized until fourth-quarter 2018. Also, elevated costs pertaining to the separation of the Electrical business and the strengthening of the U.S. dollar might be deterrents to its performance. (Read more: Will Elevated Costs Impair Pentair's Q3 Earnings?)


Pentair has an Earnings ESP of -0.43% and carries a Zacks Rank #4 (Sell), which makes surprise prediction inconclusive. As it is, we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.


IDEX Corporation IEX, which is a global fluidics leader serving high growth specialized markets, will report third-quarter 2018 results after the market closes. The company reported year-over-year improvement in both the top and bottom lines in the last reported quarter


It has surpassed the Zacks Consensus Estimate in all the four trailing quarters, delivering an average positive earnings surprise of 4.37%. 


IDEX Corporation Price and EPS Surprise


IDEX Corporation Price and EPS Surprise

IDEX Corporation price-eps-surprise | IDEX Corporation Quote

The consensus estimate for IDEX’s third-quarter earnings is $1.31, reflecting year-over-year growth of 21%. Revenues for the quarter are pegged at $615 million, projecting a 7% rise. 

Strengthening end markets, improved orders and a strong backlog are expected to benefit results in the to-be-reported quarter. However, unfavorable movements in foreign currency, rising cost of sales and operating expenses will likely be a drag.


IDEX has an Earnings ESP of +0.46%. However, the stock currently carries a Zacks Rank of #4. This combination makes it difficult to conclusively predict an earnings beat. (Read more: Idex Q3 Earnings Preview: What's in the Cards?)


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