Please ensure Javascript is enabled for purposes of website accessibility

3 Things to Look Out For When Caterpillar Reports Earnings

By Lee Samaha - Oct 23, 2017 at 5:29AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Looking ahead and analyzing the construction machinery company's upcoming earnings.

Caterpillar Inc. (CAT -0.26%) stock has soared in 2017, on the back of a string of consensus-busting earnings and analyst upgrades. The main reason has been its improving construction, mining, and energy industry verticals. Moreover, analysts have recently raised price targets for the stock in anticipation of a strong set of third-quarter earnings.

Clearly, the company has a lot of good momentum behind it, but can it continue? Let's preview the earnings report that comes out on Oct. 24 to see what investors need to keep an eye out for.

a caterpillar excavator going through a field

Image source: Getty Images

Guidance

Caterpillar's management has progressively raised full-year sales and earnings guidance as the year has progressed. Essentially, Caterpillar's high degree of operating leverage means it takes a relatively small revenue increase to translate into increased profits -- similarly, when sales downturns occur, Caterpillar's earnings will take a big hit. Therefore, the increases in sales guidance, resulting from better end markets, have led to a dramatically increased profit outlook.

Here are some estimates for the full year 2017.

Metric

January

April

July

Current Analyst Consensus

Revenue

$36-$39

$38-$41

$42-$44

$43

Profit per share excluding restructuring

$2.90

$3.75

$5

$5.29

Data source: Caterpillar Inc. presentations. Revenue in billions.

That said, the current analyst consensus is above management's guidance range, so the market appears to be expecting a guidance increase in the results. It's definitely something to look out for, because the stock could be at risk if management doesn't deliver a good sales growth and margin outlook. For example, Deere & Company (DE 0.72%) stock took a notable hit after the company's third-quarter earnings report disappointed with its margin outlook

Construction outlook

An analysis of how Caterpillar makes money reveals that construction is its key long-term end market. Although the cyclicality of its energy and resources revenue creates near- to mid-term earnings volatility that can be the swing factor in its stock-price movements, the health of the construction industry is still the long-term consideration.

Indeed, it's part of the reason some investors prefer Caterpillar to Deere, a company more focused on the agricultural equipment sector. Looking ahead to Caterpillar's upcoming earnings, we can see two reasons to believe in a Caterpillar surprise on the upside with its construction numbers and commentary.

Deere's full-year worldwide construction and forestry segment outlook has strengthened significantly as the year has progressed, from 1% full-year sales growth last November to 7% in February, 13% in May, and 15% in August. Note that Deere's last earnings came in August, compared to July for Caterpillar.

In addition, U.S. residential and construction spending continues to improve in 2017, while the market waits for a potential boost in infrastructure spending from President Trump.

US Construction Spending Chart

US Construction Spending data by YCharts

China

Investors shouldn't underestimate the importance of the country and the Asia-Pacific region on Caterpillar's earnings this year. There's no doubt that better-than-expected economic growth in China has positively affected earnings at industrial companies this year. For example, Caterpillar's segment equipment sales rose by 10% to $10.6 billion in its second-quarter, and a breakout of the numbers demonstrates the contribution made by improving end markets in Asia/Pacific in the quarter. Here's a look at the company's Q2 sales improvements:

Region

Construction

Resource Industries

Energy and Transportation

North America

$71

$73

$173

Latin America

$87

$41

$35

Europe, Middle East, and Africa

($46)

$79

$17

Asia-Pacific

$392

$109

($34)

Data source: Caterpillar Inc. presentations. In millions of U.S. dollars. 

The question is, what will China's GDP growth be in the second half of the year? In particular, will capital spending in its mining and construction end markets be as supportive to Caterpillar's sales as they were in the first half? It's something for investors to focus on, because many economic commentators are expecting China's rate of GDP growth to slow in the second half.

Looking ahead

Whenever a stock has the kind of strong run-up in stock price that Caterpillar has -- up nearly 50% in the last year -- it usually makes sense to keep a close eye on developments. I would argue that Caterpillar's stock needs a guidance boost to keep going higher, along with a combination of strong U.S. construction spending and ongoing China GDP growth. These are three key things to focus on in the upcoming results.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Caterpillar Inc. Stock Quote
Caterpillar Inc.
CAT
$178.29 (-0.26%) $0.47
Deere & Company Stock Quote
Deere & Company
DE
$301.63 (0.72%) $2.16

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.