Caterpillar Earnings Preview: Economic Outlook Seems Good, Tariffs Adding Uncertainty

After a tough four-year stretch of declining sales, Caterpillar Inc. CAT has been making a comeback as commodity prices recover and economic growth continues. When CAT reports earnings before market open on Monday, July 30, analysts are expecting the company’s sixth straight quarter of top- and bottom-line growth.  

For Q2, CAT is expected to report adjusted EPS $2.73 on revenue of $13.88 billion, according to third-party consensus analyst estimates. In the same period last year, CAT reported adjusted EPS of $1.49 on revenue of $11.33 billion.

When CAT released Q1 results, revenue increased 31 percent year-over-year to $12.9 billion and adjusted earnings were up 120 percent to $2.82 per share. After the strong results, management raised their full-year outlook for adjusted EPS to a range of $10.25 to $11.25, up from previous guidance of $8.25 to $9.25 per share. Higher sales volumes were the primary reason management cited for the increase, with some help from better pricing trends.

Across its three main segments, CAT reported double-digit revenue growth. Revenue in the construction segment increased 38 percent year-over-year to $5.68 billion, while revenue in the energy and transportation grew 26 percent to $5.22 billion. Revenue from resource industries, the company’s smallest segment, was up 31 percent to $2.31 billion.

The commodity recovery that has helped benefit CAT in some of its end markets, has also negatively impacted the company by adding to its material costs. On last quarter’s earnings call, management said they expect higher material costs, particularly steel, to be a headwind all year. In addition, the 25 percent tariffs on U.S. steel imports has cast a large shadow over companies that rely heavily on the material.

Outside of the company’s main segments, the company’s backlog is a common focus among analysts to gauge the health of future business. At the end of the first quarter, the company said its backlog was roughly $17.5 billion, up $1.7 billion since the end of 2017. Management said the increase was driven by construction, and energy and transportation, while the resource industries backlog remained flat.

The company has also been in the midst of a multi-year cost cutting and restructuring effort. It started in September 2015 and management said its target was to lower annual operating expenses by about $1.5 billion. So it’s likely to be another area where investors are checking for progress.

Caterpillar One-Year Chart. CAT has been taking a breather after a 67.66 percent increase in 2017. So far in 2018, the stock is down about 9 percent, versus a 5.22 percent increase in the S&P 500 (SPX). The stock found some support around the low-$130 level at the end of June and early July.  Chart source: thinkorswim^® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Caterpillar Options Trading Activity

Around CAT’s upcoming earnings release, options traders have priced in a 3.7 percent stock move in either direction, according to options data on the thinkorswim® platform. Implied volatility was at the 56th percentile as of this morning. 

In short-term trading at the August 3 weekly expiration, calls have been active at the 144 and 145 strike prices. Volume has been much lighter for puts, with a small amount of activity at the 141 and 142 strikes.

At the August 17 monthly expiration, recent trading has been concentrated at the 140 and 145 strike prices. Again, volume is lighter on the put side, with most of the activity at the 140 strike. The 135 strike put had lower volume in recent sessions, but open interest is high at that level. There were 12,980 contracts open at the end of Thursday’s session at that level, compared to about 5,000 to 6,000 at the next highest strikes. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

What’s Coming Up

Earnings season continues next week with several major reports on the docket. Pfizer inc. PFE and Procter & Gamble PG report before market open on Tuesday, July 31. That afternoon, tech giant Apple Inc. AAPL releases its results. Tesla inc. TSLA reports after the close on Wednesday, August 1; and MGM Resorts International MGM reports before the open Thursday, August 2, with Activision Blizzard, Inc. ATVI scheduled after the close the same day. 

The Fed’s July meeting is also coming up July 31 to August 1, and July’s employment report is due out in the morning on Friday, August 3. So there’s a lot coming up to consider keeping an eye on. For a look at what else is going on, check out today’s Market Update if you have time. 

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.