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Caterpillar (CAT) to Report Q3 Earnings: What's in the Offing?

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Caterpillar Inc. (CAT - Free Report) is slated to report third-quarter 2018 results on Oct 23 before the opening bell. Notably, the mining and construction equipment behemoth delivered a year-over-year improvement of 99% and 24% in earnings and revenues, respectively, in the second quarter of 2018. Both the top and bottom line also beat the Zacks Consensus Estimate. Continued strength in many of its end markets and persistent focus on cost control aided results. This marked the company’s sixth consecutive quarter of both top and bottom-line growth, following a string of dismal performances for four years.
Notably, Caterpillar outpaced earnings estimates in the trailing four quarters, recording an average positive earnings surprise of 31.79%. Consequently, investors are keen to know whether Caterpillar will be able to maintain the momentum in the third quarter of 2018 as well.
The company’s share price has outperformed the industry in the past year. The shares gained 8.1%, ahead of the industry’s growth of 7.1%. An earnings beat is likely to fuel the price momentum further.
Looking at the upbeat estimates for the both earnings and revenues for the third quarter, it seems likely that the company will deliver year-over-year improvement on both metrics. This is also supported by strong third-quarter projections for its segments — Machinery, Energy & Transportation which generates a major chunk of revenues and earnings. Notably, performance will be driven by its positive end markets namely construction, mining and energy.
Let’s delve deeper and take a look at factors that might influence third-quarter results.
Improved Markets Will Drive Top-Line Growth
Per the Zacks Consensus Estimate, the Machinery, Energy & Transportation segment, which contributed approximately 95% of total revenues in second-quarter 2018, is expected to log year-over-year growth of 19% in revenues to $12.8 billion in the third quarter of 2018. We believe the company will witness growth in all its segments — Construction Industries, Resource Industries, Energy & Transportation.
At the end of second-quarter 2018, Caterpillar’s backlog was at $17.7 billion, an improvement of $2.9 billion year over year aided by increase at all segments. This bodes well for performance in the to-be-reported quarter.
The Zacks Consensus Estimate for total sales of $13.2 billion for the third-quarter indicates growth of 15.8% from the prior-year quarter. Sales growth will be driven by solid momentum across all its segments. In the Resource Industries segment, sales is expected to be around $2,423 million as per the Zacks estimates, a projected year-over-year growth of 30%. Sales will be driven by continued strong demand for aftermarket parts. Further, miners are resuming capital spending which bodes well for the segment. 
The Construction Industries is also anticipated to remain strong in the to-be-reported quarter as China and other APAC countries will continue to drive growth on the back of investments in infrastructure. In North America, continued improvement in residential and non-residential construction as well as revival in infrastructure demand will drive revenues. Per the Zacks Consensus model, the Construction segment’s sales is projected at $5,760 million for the to-be-reported quarter, an expected year-over-year growth of 19%. 
For the Energy & Transportation segment, sales to the Oil and Gas sector is likely to increase in the quarter, led by reciprocating engines for gas compression and well-servicing activity in North America. Sales to the Transportation sector is likely to benefit from recent acquisitions in rail services. Per the Zacks Consensus model, the segment’s sales is expected to grow 26% year-over-year to $4,972 million in the to-be-reported quarter.  
Focus on Cost Control to Boost Profits
Caterpillar is undergoing significant restructuring and cost reduction initiatives which have been benefiting its margins.  In fact, the third quarter is anticipated to be no exception to the trend. 
For the to-be-reported quarter, the Zacks Consensus Estimate for Profit before Taxes for the Machinery, Energy & Transportation segment is pegged at $2 billion, a 46% improvement from the prior year. This can be attributed to a rise of 23% in the Construction segment’s operating profit to $1.1 billion, per the latest Zacks Consensus Estimate.  Further, the Resource Industries segment is expected to report an operating profit of $409 million, a substantial improvement from the prior-year quarter figure of $226 million. The Energy & Transportation segment is anticipated to report operating profit of $959 million, a rise of 28% from the year-ago quarter.
Caterpillar Inc. Price and EPS Surprise
Caterpillar Inc. Price and EPS Surprise

Caterpillar Inc. price-eps-surprise | Caterpillar Inc. Quote

The Zacks Consensus Estimate for Caterpillar’s earnings has moved up 9% over the last 90 days and is currently pegged at $2.832 for the third quarter. The estimate reflects an improvement of 44.6% on a year-over-year basis.

What Our Model Indicates

Our proven model suggests that Caterpillar is likely to beat estimates in the quarter to be reported as it has the right combination of two key ingredients. A stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. 
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +1.00%. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise.
Zacks Rank: Caterpillar has a Zacks Rank #3, which, when combined with a positive ESP, makes us confident of earnings beat. 
We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks Worth a Look
Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Tetra Tech, Inc. (TTEK - Free Report) has an Earnings ESP of +0.96% and a Zacks Rank #2 (Buy). Its shares have gained 40% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Flowserve Corporation (FLS - Free Report) has an Earnings ESP of +1.72% and a Zacks Rank #2. The stock has gained 16% in a year’s time.
Deere & Company (DE - Free Report) has an Earnings ESP of +1.39% and a Zacks Rank #3. The company’s shares have been up 18% during the past year.
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