Caterpillar Inc. Earnings: Will Construction Finally Pick Up Steam?

On Thursday Caterpillar (CAT +3.27%) will release its quarterly report, and investors have decided that the heavy-equipment maker is finally ready to see a full recovery, sending its shares to levels the company's stock hasn't seen in two years. Yet across the industry, from Caterpillar and fellow mining-equipment maker Joy Global (JOY +0.00%) to agricultural equipment specialist Deere (DE +2.42%), concerns about the ability of customers to spend money on capital expenditures is weighing on growth estimates -- and not just this quarter, but for several quarters into the future in some cases.

Caterpillar exemplifies the concept of a cyclical stock, with its prospects rising and falling with levels of construction, infrastructure, and mining activity throughout the global economy. The U.S. economy has shown definite signs of steady improvement recently, and that's been a critical part of Caterpillar's share-price rebound. Yet with ongoing challenges in other areas of the world, most notably China, Caterpillar can't afford to declare victory without following through and making efforts to help would-be customers find ways to buy its products. 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.

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Stats on Caterpillar

Source: Yahoo! Finance.

Can Caterpillar earnings build on past success this quarter?
Analysts have grown a lot more upbeat about Caterpillar earnings in recent months, keeping first-quarter estimates steady but boosting their full-year projections for 2014 and 2015 by about 3% each. The stock has soared in response, gaining 12% since mid-January in a flat market.

Caterpillar's fourth-quarter-earnings report showed the extent to which the company has had to find ways to muddle through in a tough environment for the industry. Revenue dropped 10% from the year-ago quarter, but major cost reductions helped Caterpillar boost its adjusted earnings by 5%. Given how hard the stock has been hit in recent years, even lackluster guidance for 2014 gave investors some confidence that the worst times for Caterpillar could finally be coming to an end.

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Yet many of the challenges that have hurt Caterpillar so much in recent years are still plainly evident. Both Caterpillar and Joy Global rely on the mining industry for substantial parts of their overall business, and conditions in mining remain under pressure, with low market prices for commodities and high costs that are threatening the economic viability of companies that are among Caterpillar's customers. Even Deere, whose agricultural focus has insulated it somewhat from adverse conditions elsewhere, saw sales drop slightly in the fourth quarter. Moreover, poor export figures from China suggest that the business boom that drove the emerging-market nation's growth could be reversing itself, and that could hurt Caterpillar's Chinese sales going forward.

The hope that Caterpillar has is that the construction industry worldwide will finally start looking up. In the U.S. you can find a lot of evidence for that conclusion, both in residential construction and in commercial projects, where pent-up demand after a cold winter could well drive Caterpillar sales up dramatically in the spring months. Moreover, by using its network of independent dealers to ramp up efforts to bring in revenue, Caterpillar hopes to weather the storm domestically and bridge the gap until the next global economic surge begins.

In the Caterpillar earnings report, watch for signs of whether better conditions in the U.S. can outweigh sluggishness in China. Without the help of both domestic and international markets, Caterpillar could have a tough time justifying its recent share-price gains to investors focused on the equipment-maker's fundamentals.

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