Will Caterpillar (CAT) Retain Positive Earnings Streak in Q2?

Caterpillar, Inc. CAT is scheduled to announce second-quarter 2017 earnings report before the opening bell on Jul 25.

The company had a stellar first-quarter delivering year-over-year improvement in both the top line and bottom line for the first time in 10 quarters. The better-than-expected results came on the back of its incessant efforts to cut down costs to counter the impact of low-end user demand across many of its businesses.

Let’s see how things are shaping up prior to this announcement.

Earnings Whispers

Our proven model shows that Caterpillar is likely to beat earnings in the to-be-reported quarter because it has the right combination of two key ingredients – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), which have a significantly higher chance of beating earnings.

Zacks ESP: Caterpillar’s Earnings ESP is +4.92% as the Most Accurate estimate of $1.28 is pegged higher than the Zacks Consensus Estimate of $1.22. A positive ESP serves as a meaningful and leading indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Caterpillar carries a Zacks Rank #2. The combination of the company’s favorable Zacks Rank with a positive ESP makes us confident of an earnings beat.

Notably, the stocks having a Zacks Rank #4 and 5 (Sell-rated stocks) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Surprise History

Caterpillar, Inc. Price and EPS Surprise

Caterpillar, Inc. Price and EPS Surprise | Caterpillar, Inc. Quote

In the last quarter, Caterpillar’s earnings beat the Zacks Consensus Estimate by 106.45%. Going by the earnings surprise history, Caterpillar beat estimates in the trailing four quarters, leading to an overall positive average surprise of 40.25%.

What's Driving the Better-Than-Expected Earnings?

At the end of first-quarter 2017, Caterpillar’s backlog was $14.8 billion, a $2.7 billion improvement driven by improvement across all segments. Notably, this was the first year-over-year expansion in backlog since third-quarter 2014 and at the highest level since second-quarter 2015. This bodes well for second-quarter performance.

Caterpillar reported a 1% rise in April sales followed by an 8% growth in May, driven by the continuing improvement in Asia Pacific, particularly in Resource Industries. The Asia Pacific region has delivered consistent growth in sales since Aug 2016. Construction Industries has also shown marked improvement in the region. Asia Pacific sales continue to increase primarily owing to increased infrastructure and residential investment in China.

Also in the U.S, leading indicators of non-residential construction signal robust conditions ahead for the domestic construction industry. The ABI has been at 50 or better for 20 of the last 24 months indicating sustainable growth in architectural activity. This will aid Caterpillar’s performance in the second quarter.

Additionally, Caterpillar’s ongoing significant restructuring and cost reduction initiative that include consolidation or closure of facilities, laying off employees will help boost margins.

Price Performance

In the past three months, the Caterpillar stock has outperformed the Zacks categorized Machinery – Construction/Mining industry. The company has delivered a return of 15.2%, while the industry gained 12.9%.

Some Other Promising Stocks

Caterpillar is not the only company looking up this earnings season. Here are some other stocks in the industrial products sector that you may want to consider as our model shows they too have the right combination of elements to post an earnings beat this quarter:

AGCO Corporation AGCO has an Earnings ESP of +1.92% and carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

AptarGroup, Inc. ATR has an Earnings ESP of +1.04% and a Zacks Rank #2.

Avery Dennison Corporation AVY has an Earnings ESP of +1.68% and a Zacks Rank #2.

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