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Why Is Caterpillar (CAT) Up 8.1% Since Its Last Earnings Report?

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A month has gone by since the last earnings report for Caterpillar Inc. (CAT - Free Report) . Shares have added about 8.1% in that time frame.

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

Caterpillar Gains on Q1 Earnings Beat, Hikes '18 View
 
Caterpillar delivered adjusted earnings per share of $2.82 in first-quarter 2018, surging a whopping 120% year over year.  This can be attributed to continued strength in many of its end markets as well as incessant focus on cost control. Earnings also surpassed the Zacks Consensus Estimate of $2.11 by a margin of 34%. The quarterly performance marked the company’s fifth consecutive quarter of both top and bottom-line growth after a string of dismal performances for four years. Following the upbeat results, Caterpillar’s shares advanced 3.77% in pre-market trading.
 
Including one-time items, Caterpillar reported earnings per share of $2.74 in the quarter compared with 32 cents per share in the prior-year quarter.
 
Improved End Markets Drive Revenues
 
Revenues improved 32% year over year to $12.9 billion in the quarter, surpassing the Zacks Consensus Estimate of $11.6 billion. The company witnessed higher sales volume owing to improved end-user demand and favorable changes in dealer inventories. End-user demand improved across all regions and most end markets. Sales increased across all regions with Asia/Pacific and North America leading the pack.
 
Higher Sales Lead to Improved Profits
 
In the reported quarter, cost of sales increased 26% year over year to $8.6 billion. Gross profit advanced 42% to $4.3 billion. Selling, general and administrative (SG&A) expenses increased 20% to $1.3 billion due to higher short-term incentive compensation expense and targeted investments. Research and development (R&D) expenses rose 4% year over year to $443 million.
 
Adjusted profit before taxes were pegged at $2.6 billion, a substantial improvement from $1.5 billion in the prior-year quarter. Higher sales volume and favorable price realization were somewhat offset by higher selling, general and administrative (SG&A) and research and development (R&D) expenses. Manufacturing costs were flat as lower warranty expense and the favorable impact from cost absorption were negated by higher material costs, freight costs and short-term incentive compensation expense.
 
All Segments Deliver Growth
 
Machinery and Energy & Transportation (ME&T) sales surged 33% year over year to $12.2 billion. Sales of Energy & Transportation gained 26%, owing to higher sales across all applications. Sales at Resource Industries improved 31% driven by higher end-user demand for equipment in all regions. Construction Industries sales rose 38% on the back of favorable impact of changes in dealer inventories as well as higher end-user demand for construction equipment.
 
The ME&T segment delivered an operating profit of $2 billion, substantial improvement from $0.2 billion in the year-ago quarter. At the Energy & Transportation segment, operating profit improved 60% to $874 million higher sales volume and favorable price realization, partially offset by higher short-term incentive compensation expense and targeted investments.
 
The Resource Industries reported operating profit of $378 million in the quarter, a 136% surge from $160 million in the prior-year quarter thanks to higher sales volume and favorable price realization which was partially offset by higher short-term incentive compensation expense and a slightly unfavorable impact from currency. Construction Industries’ profit soared 76% to $1.1 billion due to favorable price realization, higher sales volume. However, higher SG&A/R&D expenses, material costs, primarily for steel, and freight costs somewhat negated these gains.
 
Financial Products’ revenues went up 4% to $733 million. Financial Products' profit was $139 million in the quarter, down from $186 million in the prior-year quarter. The increase can be attributed to higher average earning assets in Asia/Pacific and higher average financing rates in North America, partially offset by an unfavorable impact from lower intercompany lending activity in North America. Financial Products’ segment profit was $141 million in the first quarter of 2018, compared with $183 million in the prior-year quarter due to an increase in the provision for credit losses at Cat Financial, partially offset by an increase in net yield on average earning assets.
 
Financial Position
 
Caterpillar ended the first quarter 2018 with cash and short-term investments of $7.9 billion, down from $8.3 billion at 2017 end. ME&T operating cash flow for the quarter was $948 million, lower than $1.5 billion in the prior-year quarter mainly due to higher short-term incentive compensation payments in the first quarter of 2018, compared with the first quarter of 2017. Caterpillar repurchased $500 million of shares in the reported quarter.
 
The debt-to-capital ratio at ME&T was 34.4% as of first-quarter 2018 end, lower than 36.6% as of 2017-end.
 
Robust Backlog
 
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 was mainly driven by higher backlog at Construction Industries and Energy & Transportation  while backlog at Resource Industries remained flat from 2017-end.
 
Hikes Guidance for 2018
 
Backed by strong first-quarter 2018 performance, improving demand across all regions and end-markets and continued global economic growth, Caterpillar now expects adjusted earnings per share between $10.25 and $11.25 for fiscal 2018. The company had earlier provided adjusted earnings per share guidance of $8.25-$9.25 for the fiscal. All the segments as well as regions are expected to log growth in the year and contribute to improved volumes. However, improved price realization is anticipated to be partially offset by material cost increases due to higher commodity prices.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been eight revisions higher for the current quarter.

Caterpillar Inc. Price and Consensus

 

Caterpillar Inc. Price and Consensus | Caterpillar Inc. Quote

VGM Scores

At this time, CAT has a nice Growth Score of B. Its Momentum is doing a bit better with an A. The stock was also allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. 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 momentum investors than those looking for value and growth.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise CAT has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.




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