We expect Caterpillar Inc. (CAT), the mining and equipment behemoth, to beat expectations when it reports third-quarter 2014 results before the market opens on Oct 23.
In the preceding quarter, Caterpillar delivered a positive earnings surprise of 11.92%. Also, the company has posted an average positive earnings surprise of 11.60% over the past four quarters.
Why a Likely Positive Surprise?
Our proven model shows that Caterpillar will beat earnings because it has the right combination of two key components.
Positive Zacks ESP: Caterpillar currently has an Earnings ESP of +2.26%. This is because the Most Accurate estimate stands at $1.36 per share, while the Zacks Consensus Estimate is pegged at $1.33.
Zacks Rank #3 (Hold): Note that stocks with a Zacks Rank #1, 2 and 3 have a higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Caterpillar’s Zacks Rank #3 (Hold) and Earnings ESP of +2.26% makes us confident of an earnings beat.
What is Driving Better-than-Expected Earnings?
Caterpillar’s estimates for fiscal 2014 have undergone positive revisions following its second-quarter earnings results. The company reported a 17% increase in its second-quarter earnings to $1.69 per share. Its incessant efforts to cut costs and continued deployment of operational improvement in the Construction segment along with record profit from Energy & Transportation helped mitigate the effect of lower mining-related sales on its profits.
Backlog at the end of the second quarter was $19.3 billion, up 1% year over year, driven by an improvement in Energy & Transportation. This marked a reversal from the decline in backlog reported in 2013. Caterpillar had also stated its intent to purchase approximately $2.5 billion of its common stock under an accelerated stock repurchase transaction in the third quarter. Both of these will contribute to Caterpillar’s top and bottom line in the third quarter.
Moreover, The Architecture Billings Index, a leading indicator of U.S. non-residential construction, rose to 55.8 in July – a seven-year high. In August, ABI was at 53.0, down from the mark reached in July but above the benchmark of 50.0. Caterpillar will stand to benefit from the strong momentum in the construction sector.
Caterpillar has initiated extensive cost-saving programs across its global businesses and will continue to benefit from additional restructuring actions in 2014 to optimize its cost structure and improve its operational efficiency.
Other Stocks to Consider
Caterpillar is not the only company which is looking up this earnings season. The following companies are also likely to beat earnings in the to-be-reported quarter:
Century Aluminum Co. (CENX) with an Earnings ESP of +11.76% has a Zacks Rank #1 (Strong Buy).
Alamo Group, Inc. (ALG) has an Earnings ESP of +4.44% and a Zacks Rank #2 (Buy).
Nordson Corporation (NDSN) with an Earnings ESP of +0.88% holds a Zacks Rank #2.
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