Caterpillar Investors Expecting A 'Beat-And-Raise' Print

Amid high expectations, Caterpillar Inc. (NYSE:CAT) investors are bracing for a beat-and-raise quarter, Baird said in a note previewing the company's first quarter results.

Caterpillar is scheduled to report is results before the markets open on April 25.

The company is expected to report earnings of $0.59 per share and revenues of $9.14 billion, down an estimated 12 percent and 3.40 percent, respectively.

Analyst Mircea Dobre said the firm's rental equipment survey pointed to continued overall improvement in activity and demand for construction equipment, as oil & gas headwinds are dissipating and the Trump sentiment bump is alive and well. These, according to the analyst, will lead to a dealer inventory restock in 2017.

Additionally, the analyst noted mining aftermarket inflecting higher along with parts demand in O&G reciprocating engines.

Earnings Prowess

"The argument for the "new money" long-term buyer of CAT shares at current level rests on earnings power in the next up cycle (next 4-5 years) with the expectation that CAT's earnings will be able to exceed $10/share," the firm opined.

For earnings to reach $10 per share by 2020, the firm said an incremental $17 billion revenue is warranted, suggesting 50 percent higher revenues than in 2016. Additionally, construction and E&T should get back to prior peak and resources should more than double from current levels, Baird said.

"While such growth is possible, we view it as unlikely with peak EPS potential likely closer to $8.50/share," the firm believes.

For the company to attain earnings per share of $8-10 over the next four years, the current business cycle should endure that long and sustainably accelerate from current activity. Levels. However, the firm sees this to be a tall order, as the U.S. economy is displaying clear late-cycle characteristics, going by employment, consumer confidence, capacity utilization and slow but clear Fed tightening.

Near-Term Stock Appreciation Likely

Despite elevated expectations, the firm expects the shares to move higher near term. That said, from a longer-term perspective, the firm believes upside is limited. If the stock reaches the $105-$110 levels, the firm thinks risk/reward would become increasingly unattractive for longer-term investors.

Raising Estimates, Price Target

Baird raised its 2017 earnings per share estimate by $0.55 to $3.70 and 2018 earnings per share estimate by $0.35 to $4.75. The firm attributed the upward adjustment to the results of its Rental Equipment survey and multiple data points through the quarter, which point to improved demand.

The firm has a Neutral rating on the shares of Caterpillar, while it lifted its price target to $102 from $97.

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