Caterpillar (CAT - Free Report) shares have rallied 8% in the past six months, nearly keeping up with the S&P 500 at +10%, on hopes for economic stimulus and infrastructure plans from Washington.
And while the stock made a new multi-year low in early 2016 under $60, the earnings picture for the company may just be beginning to bottom.
CAT is a Zacks #1 Rank this month because several analysts have raised EPS estimates, instead of lowering them like they have consistently done for most of the past two years.
In the past 30 days, the full-year 2016 profit projection has moved up from $3.07 to $3.20.
And 2017 estimates were pushed from $4.20 to $4.34, representing 35.5% annual EPS growth on the back of a projected 5.9% climb in revenues to $40.7 billion.
That's still a ways below 2012's peak at $67 billion and even 2014's flat-line around $55 billion. So it's a good time to look at what's still digging into CAT's top and bottom lines.
Short Thesis Expired?
Global investors are aware that famed short seller Jim Chanos outlined his bearish thesis on CAT last October, citing a pending real estate bubble burst in China as well as the slowdown in mining and oil & gas projects around the world.
But weeks before in September, Deutsche Bank analysts stated that they believed 2016 would be the "cyclical trough" for Caterpillar. They noted that the "bulk of the natural resource downturn in the rearview mirror" as both gold and oil recover somewhat from their bear markets.
Deutsche analyst Nicole DeBlase also asserted that Wall Street hadn't given Caterpillar credit for its aggressive restructuring efforts that saved the company almost $2.25 billion since 2013. When shares were trading around $82 she placed a $98 target on them.
That was a solid call by the DB analyst over one month ahead of the US presidential election. And CAT delivered at 27.7% upside earnings surprise for the December quarter to add some validity to their "trough" call. That $98 target was reached by January.
Excavation and Tax Tailwinds
As further proof, word came last week that sales of excavators in China were up 89% in March and +106% for the quarter. Sales of roughly 21,000 units are still below half of the peak in 2011.
If commodity markets have indeed bottomed and are now becoming beneficiaries of inflationary forces, this will continue to add to steady improvement in CAT sales and profits.
Finally, while tax reform from the new administration may be a thing of the future, one past change is coming home to roost and could have a positive impact on Q1 earnings for industrial companies.
According to analysts at Baird Equity Research, the Financial Accounting Standards Board (FASB) updated accounting standards requiring tax effects of stock compensation to flow through the income statement as discrete items in the reporting period in which they occur. The update was issued last March but became effective as of December 2016, with some companies being early adopters and impact on them has been notable.
The investment bank noted that CAT, Eaton (ETN - Free Report) , Dover (DOV - Free Report) , Illinois Tool Works (ITW - Free Report) and Lincoln Electric (LECO - Free Report) could all be beneficiaries in their first quarter reports.
Bottom line: CAT is clearly on the upswing from a big earnings trough. Investors who are optimistic about the global economy and emerging markets will find reason to hold CAT and accumulate on the dips. Any US infrastructure plans add incremental stability to that view.
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