Caterpillar Inc. (CAT - Free Report) is scheduled to report fourth-quarter earnings, before the opening bell on Jan 28. Investors will now have an insight into how much of an impact did the recent economic slowdown in China have on the manufacturer and seller of construction and mining equipment in the said quarter. After all, companies like Apple Inc. (AAPL - Free Report) cautioned about weak iPhone sales in China, while FedEx Corporation (FDX - Free Report) confirmed that weakness in China was hurting their profit margins.
China has spent a lot on infrastructure over the past few years. But, the recent slowdown hurt construction projects, bringing down the sale of excavators, tractors and bulldozers for Caterpillar.
A stalemate in trade talks between China and the United States isn’t helping the company either. Last October, Caterpillar confirmed that the impact of tariffs on metal was nearly $40 million in the third quarter and is expected to climb to $100 million and $200 million for 2018. This was, in fact, the primary reason why Caterpillar’s shares were down almost 20% last year, lagging the broader equity market. Take a look —
Factors That Raise Earnings Optimism
No doubt, China’s slowdown could be bad news for Caterpillar. But, the company should do well heading into earnings, banking on strong U.S. construction fundamentals. Caterpillar has significant exposure to residential and nonresidential construction. And in 2018, it is estimated that the U.S. residential sector will expand 4.3% and the non-residential sector will grow 0.9%, according to a report by international contractor, Mace. An uptick in wage growth and ultra-low borrowing costs are cited to be the factors driving demand for additional housing.
Caterpillar also has exposure to the oil and gas industry. Needless to say, oil and gas production is increasing despite lower oil prices, which surely acts a tailwind for Caterpillar’s business. The company, by the way, has restructured its resource business to curtail fixed costs, a move that is expected to boost earnings.
JP Morgan analysts led by Ann Duignan added that “Caterpillar’s resource business is still in the early stages of recovery and should support out-year earnings growth as well as opportunities for shareholder friendly capital allocation.” JP Morgan has given the stock an overweight with a price target of $188, which is almost 42% above current levels.
Caterpillar to See Earnings Upside
Caterpillar is well poised to report an uptick in fourth-quarter earnings, powered by gains in its construction, oil and gas, and resource businesses. Caterpillar is widely expected to report $2.98 of earnings per share for the fourth quarter, higher than $2.16 reported a year ago.
This Zacks Rank #3 (Hold) company has an Earnings ESP of +0.30%. This is Zacks’ proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Generally, stocks with a Zacks Rank #3 or better along with a positive Earnings ESP come up with a positive surprise 70% of the time. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for current fiscal earnings has trended upward over the past 60 days, as estimates have moved up from $11.64/share to $11.65/share right now.
Upbeat earnings performance, no doubt, will lead to a rally in the share price. Thus, the company’s expected earnings growth rate for the current year is a solid 69.3%, in contrast to the Manufacturing - Construction and Mining industry’s projected decline of 2.1%. In fact, the company has outperformed the broader industry so far this year (+4.4% vs +4.0%).
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