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Caterpillar at All-Time High, Spotlight on Industrial Stocks

Zacks
Caterpillar Inc. CAT touched an all-time high of $166.43 on Jan 8, before settling a tad lower at $166.03, but logging a jump of 3% in the day. The rise was triggered by an upgrade from JP Morgan, stating that the company has another solid year ahead in light of the Republican tax legislation, as quoted on a CNBC.Com article.
Rationale Behind the Upgrade
Per the firm, there is significant upside to the stock and expects it to close at $200 in 2018 — a prospect of 20% rise from current levels. With the Congress' passing the Tax Cuts and Jobs Act, it will lead to lower tax rates for Caterpillar, which in turn should translate to "higher through-cycle free cash flow." Further, per the firm, the global economy has entered into a "10-year upcycle" in commodities. Caterpillar has nine more years to benefit from the cycle.
Stellar Price Performance in the Past Year


This peak in share price is not an isolated event and the improvement has been gradual for Caterpillar over the past year. A look at the company’s price chart reveals that it put up a stellar performance, marching ahead of both the industry and S&P 500. Shares have notched a gain of 76.5%, while the industry registered growth of 74.6% and the S&P 500 advanced 18.2%. In fact, Caterpillar was the top five performing stocks in Dow Jones industrial average in 2017.
The company, which suffered 36% drop in earnings in fiscal 2016 affected by weak end-user demand in most of the industries it serves, including construction, oil and gas, mining and rail — has successfully delivered a turnaround in 2017.
What Turned the Tables For Caterpillar?
Caterpillar’s share price has witnessed an uptrend since the victory of President Trump as the company is touted to be one of the biggest beneficiaries from Trump’s plans of infrastructure spending. Moreover, thanks to its incessant efforts to cut down costs and the strength in the Asia Pacific region, Caterpillar reported year-over-year improvement in both top and bottom-line in the first quarter of 2017 — the first time in 10 quarters. The momentum continued in the next two quarters as well.
Better Performance Ahead
For the fourth quarter of 2017, the Zacks Consensus Estimate for earnings projects a year-over-year growth of 108.4% and revenues of 25.0%. Consequently, Caterpillar is set to deliver fourth consecutive quarter of both top and bottom-line growth. The Zacks Consensus Estimate for the fourth quarter for earnings and revenues are pegged at $1.73 billion and $11.97 billion, respectively.
Caterpillar has outpaced the Zacks Consensus Estimate in the trailing four quarters, delivering a positive average earnings surprise of 53.06%. Our proven model shows that the company is likely to beat earnings in the next quarter as well, as it has the right combination of two key ingredients — a positive Earnings ESP of 4.82% and a Zacks Rank #2 (Buy). A positive ESP serves as a meaningful and leading indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
The Zacks Consensus Estimate for 2017 and 2018 reflect healthy growth of 88.9% and 20.8%, respectively. Estimates for Caterpillar have moved up in the past 30 days, reflecting the optimistic outlook of analysts. The earnings estimate for 2017 has surged 23% while that of 2018 has moved up 16%, in the past 90 days. The stock has an estimated long-term earnings growth rate of 10.3%.
Industrial Stocks Well Poised for Growth
Commodities have rebounded, boosting demand for heavy mining equipment which bodes well for companies like Caterpillar. Further, construction activity has shown considerable improvement in North America as well as Asia Pacific, including China.
The company’s stellar run and growth prospects have brought back the spotlight on industrial stocks. Caterpillar’s performance instills optimism as it has long been considered as a bellwether of the global manufacturing industry and the world economy owing to the size and scope of operations. The company falls under the industrial products sector. This sector has been outperforming the S&P 500 market in recent times. In the past year, the sector has gained around 27.0%, above the S&P 500’s growth of 18.2%.


We believe that implementation of Trump administration’s growth policies, especially the proposed $1 trillion spending on infrastructure improvement, will be a boon for industrial stocks. Further, manufacturing is likely to get a boost this year from $1.5 trillion tax cut approved by the Republican-controlled U.S. Congress. The overhaul of the tax code resulted in the slashing of the corporate income tax rate to 21% from 35%.
Notably, the Industrial Products sector put up 19.6% growth in earnings in the third quarter of 2017 and 22.1% growth in earnings is projected for the fourth quarter of 2017. The sector is expected to deliver double-digit growth in all the quarters of 2018. Per our projections, the sector will log growth of 14% in the first quarter of 2018, followed by 13.4%, 10% and 13.1% in the second, third and fourth quarters, respectively. (Read more: Q4 Earnings Season Gets Underway)
Consequently, we suggest you to stay invested in the sector to reap the benefits of healthy prospects ahead. Apart from Caterpillar, which is good investment currently given its Zacks Rank #2 and factors mentioned above, we suggest few other stocks in the sector.
To zero in on stocks that are winning currently and have the potential to gain further, we have opted for one of the relatively new investment techniques, by betting on stocks near a 52-week high. The 52-week investment strategy relies on the new investment mantra, “buy high and sell higher.”
Other Stocks That Fit the Bill

Given their positive earnings revisions, we believe these four industrial stocks, all of which are near their 52-week highs, will continue moving north for now. The stocks carry a Zacks Rank #1 (Strong Buy) or 2, and have a VGM Score of A or B. You can see the complete list of today’s Zacks #1 Rank stocks here. Notably, our research shows that stocks with an impressive VGM Score of A or B when combined with a Zacks Rank 1 or 2, offer the best upside potential.
Deere & Company DE manufactures and distributes agriculture and turf, along with construction and forestry equipment worldwide. The company has a Zacks Rank #1 and VGM Score of A. The long-term expected earnings growth rate for Deere is 8.20%. It has outpaced the Zacks Consensus Estimate in the trailing four quarters, generating a positive average earnings surprise of 19.5%.
The estimate for fiscal 2017 climbed 15% in the past 60 days and moved north 22% for fiscal 2018. The stock has gained 53% in the past year. The stock closed at $161.11, trading near its 52-week high of $161.68.
Kennametal Inc. KMT is a manufacturer, marketer and distributor of high-speed metal cutting tools, tooling systems and wear-resistant parts. The stock has a Zacks Rank #2 and VGM Score of B. The company has a long-term earnings growth rate of 8.33%. The earnings estimates for the company have gone up 14% for fiscal 2018 and 9% for fiscal 2019, in the past 90 days.
The company also has an impressive earnings surprise history, beating the Zacks Consensus Estimate in the trailing four quarters, with an average positive earnings surprise of 20.56%. Its shares have surged 59% in the past year. The stock closed at $50.29 yesterday, near its 52-week high of $51.07.
Atlas Copco AB ATLKY is a world leading provider of industrial productivity solutions. It has a Zacks Rank #2 and a VGM Score of B. The company has a long-term earnings growth rate of 12.50%. It has a positive average earnings surprise of 9.89% in the trailing four quarters. The Zacks Consensus Estimate for earnings has gone up 2% for 2017 and 3% for 2018, in the past 60 days. The stock has gained 45% over the past year to close at $45.79 yesterday, close to its 52-week high of $45.85.
Donaldson Company, Inc. DCI manufactures and sells filtration systems and replacement parts worldwide. It has a Zacks Rank #2 and VGM Score of B. The company has a long-term earnings growth rate of 11.08%. The company has a positive average earnings surprise of 5.23% in the trailing four quarters. The earnings estimate for fiscal 2018 has moved up 6% while that of fiscal 2018 has advanced 7% in the past 60 days. Its shares have surged 45% in the past year. The stock closed at $49.81 yesterday, near its 52-week high of $50.10.
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