Caterpillar Inc. Earnings: Is the Rebound for Real?

Source: Caterpillar.

On Thursday, Caterpillar (CAT 1.03%) will release its quarterly report, and shareholders have been excited to see the stock climb back to levels it hasn't seen in more than two years. Even though the stock has shared the same woes as Joy Global (JOY) and new market entrant General Electric (GE 0.60%) on the mining-equipment side, signs of a rebound in construction activity has made investors more enthusiastic about Caterpillar's overall growth trajectory in the future.

Caterpillar has long had a huge presence in the construction industry, and you can see its distinctive yellow heavy equipment at construction sites around the world. But Caterpillar's purchase of mining-equipment maker Bucyrus at the height of the commodities boom turned out to be ill-timed, as the subsequent plunge in commodities prices led to a big slowdown in the mining industry and resulted in much lower levels of capital spending for equipment. At long last, though, Caterpillar thinks that prospects are getting better for at least part of its business. Let's take an early look at what's been happening with Caterpillar over the past quarter and what we're likely to see in its report.

Stats on Caterpillar

Source: Yahoo! Finance.

Are Caterpillar earnings back on the upswing?
Investors have had mixed views on Caterpillar earnings in recent months, easing back on their second-quarter estimates but boosting full-year 2014 and 2015 projections by around 5%. The stock has also kept climbing, with gains of 8% since mid-April.

Source: Caterpillar.

Caterpillar's first-quarter earnings report set the tone for the company, with solid results that relied heavily on the construction side of the business. Sales of construction equipment worldwide soared 20%, leading to a tripling of earnings for the segment. With the housing market having pushed demand for equipment for residential construction higher and with the commercial side of the construction business also picking up steam, Caterpillar was able to capitalize even as its mining-equipment segment continued to see sales plunge from year-ago levels. Even though Caterpillar warned of concerns about China and geopolitical risk, the stock climbed on the news.

Part of the problem with Caterpillar's rebound, though, is that even improving conditions in construction won't necessary help the equipment giant's results as much as investors hope. Traditionally, construction equipment has had the smallest contribution to Caterpillar's profits, with mining equipment and energy and transportation having higher operating margins.

Yet even in mining, there are some signs of a potential rebound in the cards. Several stock analysts have started to grow bullish on the coal industry, as natural gas prices have risen and coal inventories at utility companies in North America have dropped to historically low levels. Any boost in coal demand could help coal-mining companies get back on their feet. That would arguably help Joy Global the most with its smaller size and focus on mining, but Caterpillar and General Electric could see gains as well.

Meanwhile, Caterpillar is working to keep costs down. Last month, it said it would shut down three plants producing components, reducing job counts by about 170. The move is just the latest in a series of workforce reductions for Caterpillar to try to minimize expenses and keep margins healthy.

In the Caterpillar earnings report, watch to see if the company keeps seeing improving conditions in construction and a possible turnaround for mining. If it doesn't, then investors might well conclude that its share-price advance recently was premature and punish the stock in response.

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