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Caterpillar's Rally Brings Focus Back on Machinery Stocks

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Caterpillar Inc. (CAT - Free Report) touched an all-time high of $124.93, before settling down a tad lower at $124.74 on Sep 19. The stock has been on the rise following an upgrade by UBS on the back of projected strong demand for construction equipment.

Per the firm, its survey of future spending plans of 50 mining companies reveals that about 60% of firms expect to spend more on new mining equipment next year. It also expects a re-acceleration of U.S. private construction activity. It is needless to say that Caterpillar is likely to benefit from the renewed momentum in construction — which explains the recent upsurge.

However, this peak in share price is not an isolated event and the improvement has been gradual this year. A look at Caterpillar’s price run so far this year reveals that it has outperformed both the industry and the S&P 500. Shares have gained 34.5% while the industry registered an increase of 31.5% and S&P 500 advanced 11.9%.

The company which had been grappling with a weak mining industry last year and also suffered 36% drop in earnings in fiscal 2016 — seems to have delivered a turnaround this year.

What Turned the Tables For Caterpillar?
Caterpillar’s share price has witnessed an uptrend 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. Its upbeat results in the first half of 2017 also propped up the share price. Thanks to its constant efforts to cut down costs and the strength in the Asia Pacific region, Caterpillar reported year-over-year improvement in both top and bottom lines in the first quarter of 2017 — the first time in 10 quarters. The momentum continued in the second quarter as well.

Better Performance Ahead

For the third quarter 2017, the Zacks Consensus Estimate for earnings projects a year-over-year growth of 40.45% and revenues of 15.36%. Consequently, Caterpillar is set to deliver its third consecutive quarter of both top and bottom-line growth.

Fiscal 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 21% while that of fiscal 2018 has moved up 24%. The Zacks Consensus Estimate for fiscal 2017 and 2018 reflect a healthy growth of 52.6% and 28.2%, respectively. The stock has an estimated long-term earnings growth rate of 9.5%.

Caterpillar has outpaced the Zacks Consensus Estimate in the trailing four quarters, delivering a positive average earnings surprise of 41.43%. Our proven model shows that Caterpillar is likely to beat earnings in the next quarter as well, as it has the right combination of two key ingredients — a positive Earnings ESP of 2.87% and a Zacks Rank #1 (Strong Buy).

A positive ESP serves as a meaningful and leading indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Machinery Stocks Well Poised for Growth

Asia Pacific will continue to be catalyst for Caterpillar, owing to increased infrastructure and residential investment in China. Also, the U.S Architecture Billings Index (ABI), an economic indicator that provides an approximately nine to 12 month glimpse into the future of non-residential construction spending activity, has been at 50 or better recently, signaling robust conditions ahead for the construction industry. As per Dodge Data & Analytics, total U.S. construction starts for 2017 will advance 5% to $713 billion. The construction industry has now entered a more mature phase of its expansion and construction spending can be anticipated to see moderate gains through 2017 and beyond.

Caterpillar’s stellar run and growth prospects have brought back the spotlight on machinery stocks. Caterpillar’s performance instills optimism 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. The company falls under the Zacks Manufacturing - Construction and Mining industry, which is currently carrying a Zacks Industry Rank of 5 — a testimony to the fact that the industry is in fine shape. The favorable rank places the industry in the top 2% of the 250+ groups enlisted.

Thus, investing in the machinery stocks makes perfect sense at this point. Apart from Caterpillar, we suggest other Zacks #1 or 2 (Buy) Ranked machinery stocks backed by their positive earnings revisions and price appreciation.
H&E Equipment Services, Inc. (HEES - Free Report) is one of the largest integrated equipment services companies in the United States focused on heavy construction and industrial equipment. It sports a Zacks Rank #1. The company has a positive average earnings surprise of 8.86% in the trailing four quarters. The Zacks Consensus Estimate for earnings has gone up 21% for fiscal 2018. The stock has gained 14.6% year to date, ahead of the S&P 500’s increase of 11.9%.
The Manitowoc Company, Inc. (MTW - Free Report) provides engineered lifting equipment for the construction industry worldwide and carries a Zacks Rank #2. The company has a positive average earnings surprise of 55.9% in the trailing four quarters.
The earnings estimate for fiscal 2017 has moved up from a loss of 33 cents to the current 14 cents per share. The estimate for fiscal 2018 has moved up from break even earnings to 7 cents per share. The stock has gained 32.8% year to date, ahead of the S&P 500’s advance of 11.9%.
Terex Corporation
(TEX - Free Report) is a global manufacturer of a broad range of construction and mining related capital equipment. The company has delivered a positive average earnings surprise of 122.8% in the last four quarters and flaunts a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
The earnings estimate for fiscal 2017 has moved up 17% while that of fiscal 2018 has moved up 15%. The stock has gained 40.6% year to date, ahead of the S&P 500’s climb of 11.9%.

Komatsu Ltd. (KMTUY - Free Report) engages in the development, manufacture, marketing, and sale of various industrial-use products and services globally. It sports a Zacks Rank #1. The earnings estimate for fiscal 2017 has moved up 16% while that of fiscal 2018 has moved up 21%. The stock has gained 25.7% year to date, ahead of the S&P 500’s increase of 11.9%.

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