Caterpillar Inc. (CAT Quick QuoteCAT - Free Report) climbed a new all-time high of $117.55 on Aug 30, gaining 1.33% following the news that it has been awarded a five-year $663.6 million fixed-price contract from the Pentagon, beating three other companies to the race.

 

Per the deal, Caterpillar will supply commercial construction equipment to the U.S. Department of Defense’s (DoD) Defense Logistics Agency till Aug 28, 2022. The equipment will be used by different divisions of the military and government including the Army, Navy, Air Force, Marine Corps, as well as for federal civilian agencies. The equipment will be built at various locations in the United States — Illinois, North Carolina, Georgia, Texas, Arkansas, Wisconsin, and Minnesota as well as outside the country — in Austria, Belgium, England, France, Italy and Japan.

 

The company’s all-time high price of $117.55 overrode its previous 52-week high of $115.86 attained on Aug 22 on the announcement of a 12% rise in monthly sales in July — its best performance so far in 2017. Caterpillar has outperformed both the industry and S&P 500 on a year-to-date basis. Shares have gained 27.5% while the industry registered an increase of 24.5% and S&P500 advanced 11.6%.

 

What’s Behind Caterpillar’s Solid Run so Far in 2017?

 

Caterpillar's share price has witnessed an upsurge since the victory of President Trump as the company is touted to be one of the biggest beneficiaries from Trump’s plans of infrastructure spending. The company which has been grappling with a weak mining industry is finally showing signs of recovery this year. This can be attributed to its incessant efforts to cut down costs and the strength witnessed in the Asia Pacific region. The company reported year-over-year improvement in both top and bottom lines in the first quarter of 2017 for the first time in 10 quarters. The momentum continued in the second quarter with adjusted earnings per share improving 37% while revenues advanced 9.6%.  Notably, Caterpillar reported a 1% rise in monthly sales in March that put an end to its dismal 51-month long stretch of declining sales. Since then monthly sales growth has remained in the positive territory.

Estimates for Caterpillar have moved up in the past 60 days, reflecting the optimistic outlook of analysts. The earnings estimate for fiscal 2017 has surged 26.1% while that of fiscal 2018 has moved up 28.5%. The stock has an estimated long-term earnings growth rate of 9.50%. Caterpillar has outpaced the Zacks Consensus Estimate in the trailing four quarters, delivering a positive average earnings surprise of 41.43%.

 

Caterpillar sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. It also carries a  VGM score of B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. Our research shows that stocks with a VGM Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or #2 offer the best upside potential.

 

What Does Caterpillar’s Performance Mean for the Sector?

 

Caterpillar’s performance instils optimism in the broader sector as it has long been considered as a bellwether of the global manufacturing industry and the world economy owing to the size and scope of its operations. Further, economic indicators are indicating a healthy business environment for the industrial sector. For the second quarter of 2017, industrial production — a measure of output at factories, mines and utilities, rose at an annual rate of 4.7%. This was driven by impressive growth in mining and utilities and marked a substantial improvement over the first-quarter’s gain of 1.4%. Industrial production rose 0.2% in July, the sixth consecutive monthly increase.

 

Government policies encouraging better trade relations, increase in infrastructural investments, job creation and high consumer-end demand will accelerate growth of the U.S. economy. This in turn will prove beneficial for industrial stocks.

 

The industrial products sector (one of the 16 broad Zacks sectors) is thus currently enjoying a Zacks Sector Rank of 2. Notably, the Industrial Products sector put up a 18.8% growth in earnings in second-quarter 2017 and an 8% growth in earnings is projected for third-quarter 2017 and 17% for the fourth quarter.

 

Thus, investing in the industrial space makes perfect sense at this point. Apart from Caterpillar, we also suggest other Zacks #1 Ranked stocks from the sector backed by their strong earnings history, positive earnings revisions and price appreciation.

 

AGCO Corporation (AGCO Quick QuoteAGCO - Free Report) which manufactures agricultural equipment has a VGM Score of A. The stock has an estimated long-term earnings growth rate of 13.51%. AGCO has outpaced the Zacks Consensus Estimate in the trailing four quarters, delivering a positive average earnings surprise of 39.70%. The earnings estimate for fiscal 2017 has moved up 9.4% while that of fiscal 2018 has moved up 10.2%. The stock has gained 15% year to date, ahead of the S&P 500’s increase of 11.6%.

 

Kadant Inc. (KAI Quick QuoteKAI - Free Report) supplies equipment and components used in papermaking, paper recycling, recycling and waste management, and other process industries, and has a VGM Score of B. Kadant has outpaced the Zacks Consensus Estimate in the trailing four quarters, delivering a positive average earnings surprise of 19.29%. The earnings estimate for fiscal 2017 has moved up 18.9% while that of fiscal 2018 has moved up 19.1%. The stock has gained 37.9% year to date, ahead of the S&P 500’s advance of 11.6%.

 

Kaiser Aluminum Corporation (KALU Quick QuoteKALU - Free Report) manufactures and sells semi-fabricated specialty aluminum mill products, and has a VGM Score of A. The stock has an estimated long-term earnings growth rate of 15.00%. Kaiser Aluminum has outpaced the Zacks Consensus Estimate in three of the preceding four quarters, delivering a positive average earnings surprise of 17.24%. The earnings estimate for fiscal 2017 has moved up 13.5% while that of fiscal 2018 has moved up 4.6%. The stock has gained 37.9% year to date, ahead of the S&P 500’s climb of 11.6%.

 

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