Caterpillar Earnings Preview: Will the Equipment Giant Bounce Back?

Image source: Caterpillar.

Among industrial stocks, Caterpillar (CAT 3.37%) serves as a gauge of the overall economic health of the world. By selling a wide variety of heavy equipment for purposes ranging from construction and infrastructure to mining and energy services, Caterpillar thrives when the global economy is performing well. Yet as investors prepare for Caterpillar's second-quarter earnings report on July 23, they want to see signs that better conditions could finally start lifting the stock back toward its all-time highs from a few years ago. Let's look more closely at what's in store for Caterpillar and whether its quarterly results are likely to spur greater optimism for the stock throughout the rest of 2015 and beyond.

Stats on Caterpillar

Source: Yahoo! Finance.

Can Caterpillar push its earnings toward recovery?
In recent months, investors have had mixed views of Caterpillar earnings. The company has slashed its second-quarter projections by more than 10%, but for the full 2015 year, they've raised earnings estimates by nearly $0.30 per share even as they cut 2016 earnings-per-share estimates by more than a dime. The stock still hasn't managed to put in a very strong performance, rising just 3% since early April.

Early in the quarter, investors were optimistic about Caterpillar's prospects, with the company's first-quarter results spurring hopes that the worst was over for the heavy-equipment manufacturer. Despite continuing weakness in revenue generation, especially in the construction and resource industries, Caterpillar managed to avoid a wholesale plunge in sales in its energy and transportation division. North American results were strong, reflecting the better economic conditions in the U.S. compared to the rest of the world, and most important, Caterpillar posted solid growth in its earnings from the previous year's first quarter, boosting its full-year earnings guidance to $4.70 per share as its cost-cutting efforts start to pay off in better margins and stronger bottom-line performance.

Since then, though, nervousness about ongoing problems in different parts of the world has weighed on Caterpillar's share price. The plunge in the Chinese stock market has called into question the health of the country's future economic growth prospects, and the latest episode in the long-running Greek financial crisis has left the entire fate of the Eurozone in doubt.

Nevertheless, Caterpillar has a couple of things supporting its longer-term prospects. First, many of the customers that have deferred new purchases of equipment from Caterpillar won't be able to put off replacing aging machinery forever, and that pent-up demand looms as a potential future catalyst for even faster growth than the heavy-equipment maker has seen in the past. In addition, prices have started to stabilize in many key commodity markets, especially crude oil and mining products, and Caterpillar investors hope that once conditions in those markets start to turn around, industry players will be more comfortable making plans to spend money on capital expenditures.

Moreover, the company itself has demonstrated its confidence in its future. In June, Caterpillar announced a 10% dividend increase, marking the 21st straight year that the company has raised its quarterly payout to investors. Even though companies often make token dividend increases in order to extend similar streaks, Caterpillar's double-digit percentage increase makes it clear that the heavy-equipment maker doesn't see its recent sluggishness lasting long enough to affect its ability to reward shareholders over the long run.

In Caterpillar's earnings report, it'll be important to look at how well the company did by geographical region. You can expect the U.S. to perform well again, but the real question is whether other parts of the world will finally start to show signs of bottoming out. Without at least some signs of future promise in areas outside North America, Caterpillar could have a tough time making a sustained bounce in its stock price. In addition, making sure that there are no ugly surprises in Caterpillar's sector results -- especially in the energy arena -- will also be essential to the stock's immediate future performance.