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Construction Demand to Drive Caterpillar's (CAT) Q2 Earnings

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Caterpillar Inc.’s (CAT - Free Report) second-quarter 2021 results are scheduled to be released on Jul 30. The to-be-reported quarter’s results are likely to reflect improved performance at its Construction segment, which accounts for a major chunk of its revenues, courtesy of the ongoing strength in residential construction activity in North America and strong demand in China. Recovery in U.S non-residential construction and strong demand from Brazil’s construction sector might have contributed to quarterly performance.

Caterpillar’s Construction Industries segment that manufactures machinery utilized in infrastructure, forestry and building construction, contributes around 49% of its Machinery and Energy & Transportation (ME&T) sales. The segment has been witnessing sequential improvement in the past two quarters aided by pickup in construction activity after the pandemic induced slump.

The Construction Industries’ segment’s sales amounted to $5.4 billion in the first quarter of 2021, which marked a 27% improvement year over year. The upside was due to higher sales volume driven by higher end-user demand and the impact from changes in dealer inventories. Dealers increased their inventories by $700 million during the quarter. In comparison, dealers added around $100 million to their inventories in the first quarter of 2020 as demand was severely impacted by the coronavirus pandemic.

In the first quarter of 2021, the segment witnessed high demand in North America primarily driven by the residential construction sector. Sales in Latin America and Europe benefitted from high demand and the impact of changes in dealer inventories. Sales in Asia/Pacific were mainly driven by China fueled by its government’s stimulus program focused on new infrastructure and urbanization. Driven by overall higher sales volumes, the segment reported operating profit of $1.03 billion in the first quarter of 2021, which reflected year-over-year increase of 62%..

In the second quarter, infrastructure construction — particularly for aggregates intensive highways, roads and streets is expected to have remained resilient. Solid housing market conditions in the United States backed by rising need for more work-at-home space and record-low mortgage rates as well as improvements in the non-residential market might have driven demand for Caterpillar’s construction equipment. Solid construction demand in China may have favored the segment’s performance in the quarter to be reported.

The Zacks Consensus Estimate Construction segment’s second-quarter external sales is pegged at $5,587 million, indicating growth of 39% from the year-ago quarter. The consensus mark for the segment’s operating profit stands at $1,027 million, indicating a rise of 98% from the prior-year quarter. Stronger sales and leverage on higher volumes might have contributed to the margin expansion.

Overall Expectations

The Zacks Consensus Estimate for Caterpillar’s second-quarter total sales is pegged at $12.4 billion, suggesting growth of 24.2% from the prior-year quarter. The consensus mark for earnings per share currently stands at $2.38, indicating an improvement of 131% from the last year. The quarterly results are likely to reflect upbeat demand at its Construction as well as its other segments that will help offset inflated input costs experienced through the quarter.

To know more about how the company will likely fare in the second quarter, read: Caterpillar to Report Q2 Earnings: What's in Store?

Caterpillar currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Caterpillar’s peer Terex Corporation (TEX - Free Report) , which provides aerial work platforms, materials processing machinery and crane used in construction and other sectors, is expected to witness year-over-year growth of 44% in revenues to $993 million in its second-quarter 2021 results.

The Zacks Consensus Estimate for second-quarter 2021 revenues for H&E Equipment Services, Inc. (HEES - Free Report) , another player in the same industry, is currently pegged at $294 million indicating year-over-year improvement of 5.8%. The leading provider of cranes, The Manitowoc Company, Inc. (MTW - Free Report) , is expected to report revenues of $373 million in the second quarter of 2021, suggesting growth of 13.8% year over year.