All eyes will be on Caterpillar Inc. CAT when it releases first-quarter 2015 financial results before the opening bell on Apr 23 as the mining and equipment behemoth has long been considered a bellwether of national and global economic strength.
As a reminder, in the preceding quarter, Caterpillar’s earnings per share declined 20% to $1.35 due to a muted mining environment and lower prices of oil and key mined commodities, particularly copper, coal and iron ore and the company delivered a negative surprise of 12.90%. This marked an end to a string of positive earnings surprises delivered for three consecutive quarters. Nevertheless, the company’s average positive surprise over the trailing four quarters stood at 14.29%. Let’s see how things are shaping up prior to the first quarter announcement.
Factors to Consider This Quarter
Caterpillar’s sales continue to bear the brunt of weak mining demand as mining companies keep on reducing their capital expenditures. Lower oil prices will also negatively impact both engine sales for oil production and demand for construction machines used for energy site preparations. Moreover, a stronger dollar and continued weakness in agriculture will take its toll on sales. However, the construction sector will be a saving grace for the company as leading indicators for construction activity continue to trend positive.
At the end of the fourth quarter, Caterpillar’s backlog was $17.3 billion, down from $19.7 billion at the end of the third quarter. The decrease was primarily in Energy & Transportation followed by the Resource Industries and Construction Industries. Backlog is expected to further decline in the Energy & Transportation segment during the first half of 2015.
On the cost front, higher research & development expenses is expected to be a headwind in the quarter as the company continues to invest in new and updated products, and increase work on new technologies, that have applications across the company, in order to stay competitive. On the other hand, variable manufacturing cost will be favorable in the first quarter driven by Caterpillar’s continuous efforts to reduce costs and improve efficiency as well as lower material costs. These factors will support margins. Further share repurchases will also be accretive to earnings.
Earnings Whispers
Our proven model shows that Caterpillar is likely to beat earnings as it has the right combination of two key components. Note that a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) to have a significantly higher chance of beating earnings.
Zacks ESP: The Earnings ESP for Caterpillar is +2.21%. This is because the Most Accurate estimate of $1.39 is above the Zacks Consensus Estimate of $1.36.
Zacks Rank: Caterpillar’s Zacks Rank #3 increases the predictive power of ESP. The combination of the company’s Zacks Rank #3 and a positive ESP makes us confident of an earnings beat.
We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Promising Stocks
Caterpillar is not the only firm looking up this earnings season. We are likely to see earnings beats coming from the following stocks in the industrial products sector as well:
Codexis, Inc. CDXS has an earnings ESP of +15.39% and a Zacks Rank #2. It is expected to report results on May 6.
The Babcock & Wilcox Company BWC has an earnings ESP of +2.27% and a Zacks Rank #3. It is also expected to report results on May 6.
Ingersoll-Rand Plc IR has an earnings ESP of +3.23% and a Zacks Rank #3. It will report quarterly results on the same day as Caterpillar.
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