The industrials sector is producing huge surprises this earnings season, what with so many stocks soaring on strong numbers to hit 52-week highs. Three big names, in particular, have caught my attention -- Caterpillar Inc. (NYSE:CAT), Illinois Tool Works (NYSE:ITW), and CSX Corp. (NASDAQ:CSX) -- offering up an excellent opportunity to find out what's triggering the rally and if any of these stocks is a buy.

Wait, buy at 52-week highs? Yes, you read that right, because it's a mistaken notion that all stocks at 52-week highs are overvalued and bound to fall back. Some stocks can still be fairly priced or even underpriced and can continue to run even higher, especially if they're bouncing off a down cycle. So you could miss out on substantial gains if you blindly overlook stocks hitting fresh 52-week highs.

A green computer keyboard button with the words "Buy stock"

Image source: Getty Images.

With that in mind, let's do a quick roundup of the earnings and valuation for Caterpillar, Illinois Tool Works, and CSX, and see which one is worth your money now.

Caterpillar: A strong quarter but with a downgraded EPS outlook 

It couldn't get any better for Caterpillar bulls. Shares of the world's largest construction and mining equipment manufacturer are flying through the roof on April 25, surging as much as 6.5% to fresh 52-week highs as of this writing after blowing the markets away with a stellar first-quarter earnings beat. Here are some quick Caterpillar numbers for you:

  • 3% higher revenue; adjusted EPS more than doubled to $1.28 year over year
  • $2.7 billion jump in backlog from the end of 2016
  • 5% upgrading of full-year revenue guidance at the midpoint
  • FY 2017 EPS outlook downgraded to $2.10 from $2.30 at midpoint of sales

Did you see that last point? Caterpillar expects its earnings to be lower thanks to "significantly" higher restructuring costs worth $1.25 billion versus $750 million projected earlier. This is exactly as I'd anticipated, and I'm not really surprised to see Caterpillar downgrade its profit estimates.

The biggest damper in the report was the 7% year-over-year drop in construction equipment sales from North America. On the flip side, it's hugely encouraging to see sales from Caterpillar's resource industries (mining equipment) segment surge 15% backed by strong aftermarket demand.

A quick calculation shows that Caterpillar still suffered a loss in the trailing 12 months. So, today, you're paying roughly $103 and change for a company losing money. At an estimated EPS of $2.10, that's 49 times forward earnings. Ouch.

Illinois Tool Works: Growing steadily

ITW reported its first-quarter numbers on April 24, and the stock shot up more than 5% at one point in trading as investors cheered an earnings beat and upgraded outlook. ITW's sales grew 6%, operating margin hit record highs of 23.3%, and EPS jumped 19% year over year.

The most important takeaway is that it's largely organic growth that's driving ITW's profits. Six out of its seven business segments reported positive organic growth, with automotive OEM and test and measurement/electronics reporting strong 9% and 6% jumps in organic sales, respectively. That largely helped offset flattish sales in welding and specialty products. And that's exactly what makes ITW such a great company -- its diversified portfolio means there are almost always some pockets of strength no matter what the current economic conditions are.

Management now expects to earn $6.20-$6.40 per share this year, raising its guidance by roughly 3% at the midpoint and representing at least 9% growth from 2016 levels. That also means ITW is all set to deliver a record year.

Paying a premium for a company growing as rapidly is justified. Although 22 times forward earnings for 9% projected growth is on the pricier side, it is more so when five-year growth estimates stand at 9%, too.

CSX: Setting foot on the growth track

CSX is going all out to woo investors. Don't believe me? Here are just some of the things the railroad giant announced last week:

  • 10% jump in sales, 37% jump in adjusted earnings per share for the first quarter
  • 11% increase in dividends
  • $1 billion share repurchase program
  • Projected adjusted EPS growth of 25% for FY 2017

There could be a lot more in store, as management is planning to unveil a "multi-year strategy and guidance" later this year. Not surprisingly, investors are excited and piling into the stock, driving it up to its 52-week highs. There are huge expectations from new CEO Hunter Harrison, who recently took the helm after abruptly stepping down as CEO of Canadian Pacific Railway. Harrison, after all, has a tremendous track record of turning railroads around. He clearly didn't disappoint at his first CSX earnings event.

A freight train approaching

Image source: Getty Images.

As for CSX's operational performance, two things stand out: an uptick in sales from coal and ongoing cost reduction efforts. With a challenging market like coal showing signs of hope, Harrison's presence couldn't be better timed.

Right now, CSX stock is the priciest among peers Canadian Pacific and Canadian National Railway at 22 times forward earnings, and rightly so. While its peers will be banking on end-market recovery, CSX will also have a new business strategy likely focused on cost efficiencies to boot. In other words, CSX could grow at a faster clip than peers in terms of improving operating ratio and margins.

Investor takeaway: CSX is worth a second look

While all three stocks are surging on valid grounds, CSX excites me the most. Caterpillar is too pricey for my comfort given its dismal EPS outlook, while Illinois Tool Works remains a solid, slow-and-steady winner for the long run. But CSX is just entering a transformational phase, and it could be exciting to invest in such a company now when end markets are also showing signs of a revival.

Neha Chamaria has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Canadian National Railway. The Motley Fool recommends CSX and Illinois Tool Works. The Motley Fool has a disclosure policy.