Caterpillar (CAT) to Report Q3 Earnings: What's in Store?

Caterpillar Inc. CAT is scheduled to report third-quarter 2020 results on Oct 27, before the opening bell.

Q2 Results & Surprise History

In the last reported quarter, Caterpillar’s top and bottom lines declined on a year-over-year basis owing to lower demand across all segments and geographies amid the coronavirus pandemic. However, the company beat the Zacks Consensus Estimate on both counts.

In the trailing four quarters, the mining and construction equipment behemoth beat estimates in two of the trailing four quarters, while missing the same twice. It has a trailing four-quarter earnings surprise of 13.1%, on average.

Caterpillar Inc. Price and EPS Surprise

Caterpillar Inc. price-eps-surprise | Caterpillar Inc. Quote

Q3 Estimates

The Zacks Consensus Estimate for third-quarter total sales is pegged at $9.64 billion, suggesting a decline of 24% from the prior-year quarter. The consensus mark for earnings per share currently stands at $1.14, indicating a plunge of 57% from the year-ago reported figure. Notably, the earnings estimate has been revised upward by 2% over the past 30 days.

Factors to Note

At the end of second-quarter 2020, Caterpillar’s order backlog was $12.9 billion, reflecting a decline of $1.2 billion on a sequential basis. Also, in the first half of 2020, Caterpillar’s dealers reduced inventory by about $1.2 billion owing to weak demand amid the pandemic. The company also anticipated dealers to lower their inventory by more than $2 billion for the full year. Impact of changes in dealer inventories, lower backlog and reduced capital spending at customers’ end amid the pandemic might have hurt the company’s performance in the quarter to be reported.

On a positive note, per the Federal Reserve, industrial production increased at an annual rate of 39.8% for the third quarter — a major recovery from the 42.6% contraction in second-quarter 2020. Manufacturing output also improved at an annual rate of 53.7% in the third quarter. The Institute for Supply Management’s report, the U.S Manufacturing Purchasing Managers’ Index (PMI), was 55.4% in September following 56% in August and 54.2% in July — averaging 55.2% for the third quarter. Notably, the index has been above 50 for four straight months, which denotes expansion.

These figures indicate that the manufacturing sector seems to be coming out of the COVID-19 induced slowdown aided by gradual resumption of the global economic activities and reopening of businesses. This might have led to a slight improvement in Caterpillar’s third-quarter order levels. Further, the company has been taking actions to lower costs in the wake of the coronavirus crisis. This, in turn, might have contributed to margins in the quarter to be reported.

Segment Expectations

For the Machinery, Energy & Transportation segment, which generates around 90% of the company’s total revenues, the Zacks Consensus Estimate for third-quarter 2020 is pegged at $9.1 billion, suggesting a decline of 24% from the prior-year quarter.
 
The Zacks Consensus Estimate for the Resource Industries segment’s third-quarter external sales stands at $1,678 million, indicating year-over-year decline of 23%. Commodity prices were mixed in the quarter, with gold and iron ore prices remaining strong. Copper, which bore the brunt of weak industrial demand, has recovered lately. Overall mining customers remained disciplined with their capital expenditures due to the ongoing uncertainty, which in turn might have impacted the segment’s sales.

The Zacks Consensus Estimate for the Construction segment’s third-quarter external sales is pegged at $3,911 million, suggesting a decline of 26% from the year-ago quarter. This indicates the impact of the pandemic across all regions. For the Energy & Transportation segment, the Zacks Consensus Estimate for external sales is pegged at $3,706 million, indicating a decline of 19% from the prior-year reported figure.

For the to-be-reported quarter, the Zacks Consensus Estimate for operating profit for the Machinery, Energy & Transportation segment is pegged at $836 million, indicating a plunge of 56% from the prior-year quarter. The Resource Industries segment is anticipated to report an operating profit of $144 million, suggesting a slump of 54% from the year-ago quarter. The Zacks Consensus Estimate for the Energy & Transportation segment is pegged at $676 million, suggesting a decline of 34% from the year-ago reported figure. The Zacks Consensus Estimate for the Construction segment’s operating profit stands at $471 million, suggesting a decline of 50% from the prior-year quarter.

What Our Model Unveils

Our proven model conclusively predicts an earnings beat for Caterpillar this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat.

Earnings ESP: Caterpillar has an Earnings ESP of +0.84%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: It currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price Performance

Shares of the company have gained 27.2% in the past year, compared with the industry’s growth of 24.9%.

Other Stocks Poised to Beat Earnings Estimates

Here are some other Industrial Products stocks, which you may consider as our model shows that these too have the right combination of elements to post an earnings beat in their upcoming releases.

AGCO Corporation AGCO has an Earnings ESP of +6.07% and a Zacks Rank of 1, currently.

Lindsay Corporation LNN, currently a Zacks #2 Ranked stock, has an Earnings ESP of +11.01%.

John Bean Technologies Corporation JBT has a Zacks Rank #2 and an Earnings ESP of +2.84%, at present.

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Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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