The market dynamics of Caterpillar Inc. (NYSE:CAT) stock are something of an enigma.
Famously made the target of a short call in July 2013 by renowned investment expert Jim Chanos, Caterpillar went on to report consecutive earnings misses, with an average negative surprise of nearly 14%. The company was also overshadowed by competitors such as Kubota Corp (ADR) (OTCMKTS:KUBTY), with the latter a beneficiary of the Bank of Japan’s monetary stimulus.
But as prescient as Chanos was on the fundamentals of Caterpillar, in which he cited the potentially unfavorable impact of higher capital expenditures driven by China’s real estate bubble, the actual performance of CAT stock — where it really counts — went against his predictions. About a year after that bearish forecast, Caterpillar stock had gained roughly 33%.
While CAT shares, at $84, are well below the highs set in 2014, they’re still technically profitable against the “Chanos put.”
But will that change with Caterpillar earnings just around the corner?
Caterpillar Earnings Expectations
Value investors will certainly be hopeful for a positive showing when Caterpillar’s first-quarter financial statements are released the morning of Thursday, April 23, but the overall perspective among industry experts is mixed.
According to a poll conducted by FactSet, responding analysts expect Caterpillar to report earnings of $1.35 a share, identical to last quarter’s result, and far below the $1.61 per share performance reported a year ago.
On a broader scale, however, the bearishness in Caterpillar stock might be a little overdone.
Of the last 16 earnings reports, six failed to meet Wall Street’s expectations. Within this underperformance, four consecutive misses were released within calendar year 2013 — a particularly difficult period that witnessed dramatic selloffs in the commodity markets and devastation among mining operations. Also, it should be noted that while his forecast timing was off, Mr. Chanos — whose opinions carry significant weight — did not help CAT stock.
Yet despite these challenges, Caterpillar’s historical earnings performance against analysts’ expectations is mostly in the black, and its share price at least is back to chugging along horizontally rather than plummeting.
Furthermore, technical price trends for Caterpillar shares indicate a higher-than-chance probability that the upcoming earnings report will either meet or exceed expectations.
Since January 2011, whenever the week-over-week performance of CAT stock was positive in the week prior to the earnings release date, the report beat analysts’ estimates 69% of the time, for an average surprise of 19%.
CAT stock’s performance figure heading into Thursday’s report? As of Tuesday, it’s a cool 1.66%. Historically speaking, that nods toward an implied earnings result of $1.61 per share. Talk about deja vu!
Further declines Wednesday would indicate otherwise, but if CAT stock can maintain current levels or improve upon them before Caterpillar’s report, history will be on its side.
Bottom Line
If the “Chanos put” on CAT stock has taught us anything, it’s that interpretation of underlying factors can be deceiving. Especially with industry stalwarts like Caterpillar, it’s far safer to rely on quantifiable data than it is to speculate on a blue-chip company’s demise.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
