Caterpillar Beats Q3 Estimates, Raises FY17 EPS View

Caterpillar on the stock board in Wall Street - photo - October 2017The stock of earth moving equipment manufacturer Caterpillar Inc. (NYSE: CAT) recorded a new 12-month high of $140.44 last Tuesday. The company, a Dow component, reported an exceptional fiscal 2017 third-quarter results that beat analysts’ estimates. The earnings beat is commendable for the simple reason that analysts’ have raised their estimates by about 30% in the past three months. Further, the quarterly earnings nearly quadrupled from last year. Caterpillar also raised its fiscal 2017 earnings and revenue guidance. So, on the basis of the facts provided underneath, we predict the stock of Caterpillar, which ended Friday’s trading session at $137.81, to inch up higher in the days ahead.

Aided by a strong demand for construction machinery in the Asia-Pacific region, the Deerfield, Illinois-based company reported a 24.6% increase in the third-quarter 2017 revenues to $11.413 billion, from $9.160 billion in the similar period a year ago. The Zacks Consensus estimate for the September quarter was $10.61 billion.

The Q3 2017 net profit increased to $1.059 billion, or $1.77 per share, from $283 million, or $0.48 per share, in Q3 2016. Excluding restructuring costs, the quarterly adjusted earnings were $1.95 per share, compared with $0.85 per share last year, and greater than Zacks analysts’ estimate of $1.22 per share.

Segment wise, Construction Industries reported a 37% y-o-y increase in Q3 revenue to $4.854 billion. Resource industries revenues were $1.87 billion, up 37% from last year. Energy & Transportation revenues were $3.961 billion, an increase of 12% on a year-over-year basis. Financial product revenues were almost flat at $700 million.

The company also reported an improvement in its financial condition. The operating cash flow of Machinery, Energy & Transportation (ME&T) division was $600 million in Q3 2017. Further, ME&T’s debt-to-capital ratio improved to 36.1%, from 38.6% in the previous quarter. Caterpillar also ended September quarter with a cash balance of $9.60 billion.

On the basis of a strong oil and gas market in North America and construction boom in China, Caterpillar’s management is increasing production to meet the demand from customers. The company also raised its fiscal 2017 adjusted earnings outlook to $6.25 per share, from $5 per share anticipated earlier. Caterpillar also stated that it now expects full year 2017 revenues of $44 billion, which is the top end of the guidance range provided in July. Before the results were declared, analysts were forecasting FY17 earnings of $5.29 per share on revenues of $42.94 billion.

The stock continues to move along the ascending trend line as shown in the image below. The reading of the momentum indicator is above 100, while the William Vix-Fix indicator is yet to cross above the recent peak. That indicates the uptrend is intact. So, it would be wise to have a long position in the counter.

Caterpillar - Technical Analysis - 30th October 2017

A call option seems to be an ideal investment vehicle to trade the current uptrend. We may invest in the option, provided the stock trades near $137 in the NYSE and the expiry date is on or around November 3rd.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.