Caterpillar Inc. (CAT Quick QuoteCAT - Free Report) is slated to report second-quarter 2018 results on Jul 30 before the opening bell. Notably, the mining and construction equipment behemoth delivered a whopping year-over-year improvement of 120% in earnings and rise of 32% in revenues in the first quarter of 2018 thanks to continued strength in many of its end markets as well as incessant focus on cost control. This marked the company’s fifth consecutive quarter of both top and bottom-line growth, following a string of dismal performances for four years.

 

The company’s revenues and earnings beat the respective Zacks Consensus Estimate in the last quarter. Notably, Caterpillar outpaced earnings and revenue estimates in the trailing four quarters, with an average positive earnings surprise of 33.44%. Consequently, investors are keen to know whether Caterpillar will be able to maintain the momentum in the second quarter of 2018 as well.

 

 

The company’s share price has underperformed the industry in the past year. The shares gained 22.9%, behind the industry’s growth of 24.6%. However, an earnings beat will fuel price momentum.

 

Looking at the upbeat estimates for the both earnings and revenues for the second quarter, it seems likely that the company will deliver improved year-over-year earnings on both metrics. This is also supported by strong second-quarter projections for its segments — Machinery, Energy & Transportation which generates a major chunk of revenues and earnings. Notably, performance will be driven by its positive end markets namely construction, mining and energy.

 

Let’s delve deeper and take a look at factors that might influence second-quarter results.

 

 

Per the Zacks Consensus Estimate, the Machinery, Energy & Transportation segment, which contributed approximately 94% of total revenues in first-quarter 2018, is expected to log year-over-year growth of 25% to $13.3 billion in the second quarter of 2018. We believe the company will witness growth in all its segments — Construction Industries, Resource Industries, Energy & Transportation.

 

At the end of first-quarter 2018, Caterpillar’s backlog was at $17.5 billion, up from $15.8 billion at 2017 end. The increase can primarily be attributed to higher backlog at Construction Industries and Energy & Transportation  while backlog at Resource Industries remained flat from 2017-end. This bodes well for performance in the to-be-reported quarter.

 

The Zacks Consensus Estimate for total sales of $13.8 billion for the second-quarter indicates growth of 22% from the prior-year quarter.

 

Caterpillar’s Resource Industries’ performance is likely to drive growth in second-quarter 2018. Sales are being driven by continued strong demand for aftermarket parts. Global economic momentum and increasing commodity prices is restoring miners’ profitability and they are resuming capital spending. This bodes well for the segment. The Construction Industries is also expected to remain strong in the to-be-reported quarter as China and other APAC countries will continue to drive growth due to investments in infrastructure. In North America, continued improvement in residential and non-residential construction as well as revival in infrastructure demand will drive revenues.

 

For the Energy & Transportation segment, sales into Oil and Gas applications are likely to increase in the quarter, led by reciprocating engines for gas compression and well-servicing activity in North America. Sales to Transportation sector is likely to benefit from recent acquisitions in rail services.

 

 

In September 2015, Caterpillar set upon significant restructuring and cost reduction initiative, with actions expected through 2018. Once fully implemented, the plan would lower annual operating costs by about $1.5 billion. In second-quarter 2018, revenue growth along with cost reduction will lead to an improved bottom-line as well.

 

For the quarter, the Zacks Consensus Estimate for Profit before Taxes for the Machinery, Energy & Transportation segment is pegged at $1.9 billion, a substantial improvement from the prior-year quarter’s profit of $0.5 billion. This will be driven by a rise of 36% in the Construction segment’s operating profit to $1,223 million, per the latest Zacks Consensus Estimate. Further, the Resource Industries segment is expected to report an operating profit of $294 million, a substantial improvement from the prior-year quarter figure of $97 million. The Energy & Transportation segment is expected to report operating profit of $927 million, a rise of 32% from the year-ago quarter.

 

Further, the Zacks Consensus Estimate for earnings per share of $2.66 for the quarter reflects an improvement of 79% on a year-over-year basis.

 

Here is what our quantitative model predicts:

 

Caterpillar has the right combination of two main ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — which shows that it is likely to beat earnings in the to-be-reported quarter.

 

Zacks ESP: The Earnings ESP for Caterpillar is +0.94%. This is because the Most Accurate estimate of $2.68 is pegged above the Zacks Consensus Estimate of $2.66. 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 #3, which combined with a positive ESP makes us reasonably confident of a positive earnings surprise.

 

 

Here are a few other industrial products stocks worth considering as these too have the right combination of elements to post an earnings beat this quarter.

 

Actuant Corporation has an Earnings ESP of +4.72% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. Axon’s shares have gained 18% in the past year.

 

The Earnings ESP for Rexnord Corporation is +3.74%. It carries a Zacks Rank #3. Shares of Rexnord have gone up 29% in a year’s time.

 

SiteOne Landscape Supply, Inc. (SITE Quick QuoteSITE - Free Report) has an Earnings ESP of +0.97% and a Zacks Rank #3. Its shares have surged 65% in a year’s time.

 

 

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.