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Caterpillar (CAT) Up 5.4% Since Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Caterpillar, Inc. (CAT - Free Report) . Shares have added about 5.4% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it  due for a pullback? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Caterpillar Tops Q2 Earnings & Revenues, Raises View

Caterpillar has delivered another upbeat quarter with adjusted earnings per share of $1.49 in second-quarter 2017, logging a 37% improvement year over year and also ahead of the Zacks Consensus Estimate of $1.26. The better-than-expected results were driven by the company’s disciplined cost-control efforts. Additionally, its shares advanced 4.54% in pre-market trading, following the release.

Including one-time items such as restructuring costs and a gain on the sale of an equity investment in IronPlanet, Caterpillar reported earnings per share of $1.35 in the quarter, up 45% from 93 cents in the prior-year quarter.

Revenues

Revenues improved 9.6% year over year to $11.3 billion in the quarter, surpassing the Zacks Consensus Estimate of $10.9 billion. Favorable price realization and higher sales volume, with most significant increase witnessed in Construction Industries owing to higher end-user demand for construction equipment led to the improvement.
 
Caterpillar witnessed a 25% rise in Asia Pacific driven by increase in construction equipment sales in China resulting from increased infrastructure and residential investment. Revenues increased 7% in North America on the back of increased demand for aftermarket parts and construction equipment, partially offset by the unfavorable impact of changes in dealer inventories. Sales in Latin America rose 20% due to stabilizing economic conditions in several countries in the region that led to improved end-user demand. Sales in EAME were flat.

Costs & Operating Profit

In the reported quarter, cost of sales increased 4.7% year over year to $7.8 billion. Gross profit rose 22% to $3.6 billion. Selling, general and administrative (SG&A) expenses increased 15% to $1.29 billion. Research and development (R&D) expenses declined 3% year over year to $453 million.

Adjusted operating profit improved 37% year over year to $1.82 billion owing to higher sales volume, favorable price realization and favorable mix of products that were offset by higher period costs.

Segment Results

Machinery and Energy & Transportation (ME&T) sales increased 10.3% year over year to $10.6 billion. Sales of Energy & Transportation gained 5%, owing to higher sales of aftermarket parts for reciprocating engines. Sales at Resource Industries improved 21% due to higher sales volume for aftermarket parts and the favorable impact of changes in dealer inventories. Construction Industries sales rose 11% driven by higher sales volume.

The ME&T segment reported an operating profit of $1.15 billion, a 70% jump from the year-ago quarter. At the Energy & Transportation segment, operating profit improved 16% due to higher sales volume and lower variable manufacturing costs, partially offset by higher period costs. The Resource Industries reported operating profit in the quarter compared with the loss incurred in the prior-year quarter thanks to higher sales volume and lower period costs. Construction Industries’ profit surged 64% due to favorable price realization and higher sales volume, including a favorable mix of products.

Financial Products’ revenues inched up 2% to $776 million. Financial Products' profit was $191 million in the quarter up from $202 million in the prior-year quarter.

Financial Position

Caterpillar ended the second quarter with cash and short-term investments of $10.2 billion, up from $7.17 billion at 2016 end. Total debt-to-capital ratio was 73% at the second-quarter end, lower than 74% as of 2016 end. The debt-to-capital ratio at ME&T was 38.6% as of Jun 30, 2017, lower than 41.7% as of Dec 31, 2016, and within the company’s target range of 30–45%.

Total cash flow from operating activities in the first half was $3.92 billion, compared with $2.84 billion in the prior-year comparable period. Operating cash flow at ME&T soared to $2.03 billion in the quarter from $1.168 billion in the prior-year quarter.

Backlog

At the end of second-quarter 2017, Caterpillar’s backlog was at $14.8 billion, flat sequentially. On a year-over-year basis, order backlog improved by about $3 billion driven by improvement across all segments, particularly in Construction and Resource Industries.

Guidance

Given the upbeat first-half performance, improved order activity and disciplined cost control, Caterpillar has hiked revenue guidance to the range of $42–$44 billion from the prior range of $38–$41 billion.

The company now projects earnings per share of $5.00 per share compared with previous guidance of $3.75 per share. In 2017, restructuring costs will be around $1.2 billion.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been three revisions higher for the current quarter. While looking back an additional 30 days, we can see even more upward momentum. There have been seven moves up in the last two months. In the past month, the consensus estimate has shifted by 34.4% due to these changes.

Caterpillar, Inc. Price and Consensus

VGM Scores

At this time, Caterpillar's stock has a nice Growth Score of B, though it is lagging a bit on the momentum front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for growth investors than those looking for value and momentum.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. It comes with little surprise that the stock has a Zacks Rank #1 (Strong Buy).




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