Can Caterpillar (CAT) Keep The Earnings Streak Alive In Q3?

The earnings release of Caterpillar, Inc. (NYSE:CAT) is scheduled to be announced before the opening bell on Oct 25. It is a much-awaited event as the world's largest manufacturer of construction and mining equipment is often considered an economic bellwether.

Caterpillar’s results for the past few quarters have exhibited a weak mining industry, low oil prices, a stronger U.S. dollar and China's economic woes. Notably, the company’s adjusted earnings plunged 22% to $1.09 per share in the last quarter.

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 +2.70% as the Most Accurate estimate of 76 cents is higher than the Zacks Consensus Estimate of 74 cents. A positive ESP serves as a meaningful and leading indicator of a likely positive earnings surprise.

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

In the last quarter, Caterpillar’s earnings beat the Zacks Consensus Estimate by 13.54%. Going by the earnings surprise history, Caterpillar beat estimates in three of the last four quarters, while coming in line in one quarter, leading to an overall positive average surprise of 5.20%.

CATERPILLAR INC Price and EPS Surprise

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

To counter the effect of weak end markets on its top line, Caterpillar remains committed to its goal of reducing costs, such that the decline in operating profit is no more than 25–30% of the decline in sales and revenues. The company has boosted its restructuring actions and has effectively reduced $1.1 billion in costs year to date and planning a target of over $2 billion for the full year.

Another development that will benefit the company is the recent pick up in construction-related activity. Construction in Asia Pacific is improving consistently and the EAME construction industry has also witnessed positive growth lately. Additionally, leading indicators of U.S. non-residential construction signal robust conditions ahead for the domestic construction industry.

Some Promising Stocks

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

Casella Waste Systems Inc. (NASDAQ:CWST) has an Earnings ESP of +60.00% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Owens-Illinois, Inc. (NYSE:OI) has an Earnings ESP of +3.03% and a Zacks Rank #1.

NN Inc. (NASDAQ:NNBR) has an Earnings ESP of +4.35% and a Zacks Rank #1.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>