• Caterpillar stock up 2% ahead of Q3 results.
  • Q3 revenue and earnings expected above estimates.
  • Focus to be on order book and impact of inflationary pressures.

Caterpillar Inc. (NYSE: CAT) is scheduled to report its third-quarter results before the market opens on October 28, 2021. Expectation is high that the company will deliver a year-over-year increase in earnings helped by an uptick in revenues.

The construction equipment company has been one of the biggest beneficiaries of the opening of the global economy. An uptick in construction activity after last year’s slowdown is one factor that continues to fuel expectations of better than expected results.

Chart showing CAT stock pull back

Amid the improving underlying fundamentals, Caterpillar has underperformed the overall market. The stock is up by about 2% year-to-date ahead of the quarterly results, compared to a 20% plus gain for the S&P 500. Additionally, the stock is down by about 18% from all-time highs.

Consequently, the Q3 result is crucial if the stock is to bounce back and recoup the losses accrued in recent months. A disappointing report or earnings and revenue could trigger renewed sell-off that could result in the stock edging lower.

Q3 earning expectations

Caterpillar delivered stellar Q2 results with revenue and earnings improving year-over-year and beating consensus estimates. The company is poised to deliver Q3 results at the back of a solid track record, having topped estimates in each of the last four quarters.

Wall Street expects Caterpillar to deliver third-quarter revenue of $12.4 billion, representing 26% year-over-year growth. However, it will be down by about 3.4% compared to revenue generated in the second quarter.

Chart showing Caterpillar quarterly revenue

The Machinery, Energy, and Transportation segment, which accounts for about 90% of the company’s revenue, is expected to post revenue of $12 billion, representing a 31% year-over-year increase. The Resource Industries unit is expected to deliver revenue of $2.4 billion, representing 43% year-over-year growth. The significant increase could be attributed to increased demand for the company’s mining equipment as metal prices rose significantly in the quarter.

Adjusted earnings per share is expected at $2.21, up 65% year-over-year but down by 15.2% compared to Q2 EPS.

What to look out for when Caterpillar reports

Caterpillar is believed to have benefited from the ongoing expansion in the manufacturing and construction industry with the easing of COVID-19 restrictions. Consequently, the focus will be on the company’s order book.

As of the end of the second quarter, the company’s order backlog stood at $18.4 billion, reflecting a $1.5 billion sequential increase and $5.5 billion year-over-year increase. In the fourth quarter, industrial activity increased at 4.3% as manufacturing output ticked 5.3%.

The significant increase in manufacturing and industrial activity is expected to have led to a significant increase in Caterpillar order levels. Consequently, a strong backlog and order levels should benefit the company’s performance in the quarter.

In recent quarters, Caterpillar has embarked on a cost-cutting drive as it looks to shore its bottom line. The measures have already resulted in savings of about $150 million, waiting to see if the momentum continued in the third quarter. However, there is also the possibility that Caterpillar SG&A expenses increased significantly in the quarter owing to increased incentive compensation.

In addition, investors will pay close watch to the impact of supply chain issues in the quarter and their potential long-term impact. Companies are struggling to move products, and raw materials as supply chains remain overstretched.

Runaway inflation is another potential issue that could weigh on Caterpillar’s bottom-line and topline going forward amid the inflated costs of raw materials and freight services.

Bottom line

Caterpillar is well-positioned to deliver better-than-expected Q3 results helped by strong demand for its construction and manufacturing equipment on the reopening of economies. However, the focus will be on the impact of supply chain disruptions as well as inflationary pressures.

If the quarterly report beats predictions, it should trigger renewed investor interest in the company, which could see the stock re-rate higher after the deep pullback from all-time highs.