1 Dow Stock That Could Surge Next Week

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Twice in the past 70 days, Caterpillar (NYSE: CAT) made me reel. The first time was when it announced its second-quarter numbers (which were so good I wanted to headspin in excitement!), and the second was when it cut its outlook for three years from now (which was strange enough to send me into a tizzy).   

I know it’s not over. Wait till Cat suits up with its third-quarter numbers next week. The construction-equipment king has mastered the art of beating Street estimates. Will it deliver this time?

Just beat it!

If Caterpillar generated its highest-ever revenue in its second quarter, I won’t expect the company to do an encore in its third -- not because its revenue won’t grow, but because the third quarter is seasonally a weak one owing to several shutdowns due to vacations. Yet you might as well prepare yourself to see record third-quarter revenue from the company. Analysts are expecting Cat’s sales to be around 7% to 8% higher year over year, which looks very achievable (even beatable), as construction activity in North America is picking up fast even as clouds shrouding the mining industry seem to have grown darker in recent months.

Gloomy, gloomy

For those who thought the mining industry had bottomed out, the month of August came as a shocker when BHP Billiton (NYSE: BHP) confirmed the end of commodities "boom."  Following flat top line and a sharp 35% drop in profits for its year ended June, the super-miner shelved plans for any new project till mid-next year and put on hold its ambitious $50 billion expansion plans announced just a year ago. 

It didn’t end there. Mining-equipment major Joy Global (NYSE: JOY) added salt to the wound by slashing its full-year revenue and earnings guidance for the second time this year as market conditions weakened. Though the company’s top and bottom lines in its third quarter grew in double digits, its bookings and backlog slipped 25% and 10% respectively, confirming that mining customers are pulling the plug on fresh purchases and investments.

Getting a fair idea of what to expect from Caterpillar? Though its resource industries division (80% of which is mining) isn’t the largest, it has gained significance especially after the company acquired mining-equipment maker Bucyrus International last year in its biggest-ever deal. Bucyrus has emerged as a key contributor to Cat’s revenue, something you’ll most likely see in its third quarter as well.

C for Cat or C for China?

If mining’s not shining, there’s no reason why Cat’s largest division, construction industries, shouldn’t see good top line growth given how the North American construction market (which is also the company’s main market) is gathering steam.

Only, China remains a concern, and it’s a big one too, because it is also the market where Cat is making some of its heaviest investments. Caterpillar and China have almost become synonymous now, so an earnings release without the market making up bulk of the discussion is impossible. Don’t expect anything great here, as Caterpillar is likely to have cut down production further in China during the past few months. Sales volumes still remain low, and the company is steadily exporting machines from its Chinese factories to ease inventory pressure.

And it’s not as easy as it sounds, because Caterpillar needs to ensure it doesn’t take down inventory to levels that would catch it off-guard in case the Chinese government suddenly decides to stimulate spending. In its latest earnings call, aluminium major Alcoa (NYSE: AA) cited China as one of the key reasons why it cut its full-year demand forecast to 6% from the earlier 7%. But it does have positive vibes around China’s recent stimulus package, expecting it to trigger an improvement in demand by the end of the year. China recently announced plans to spend as much as $156 billion on infrastructure projects in the immediate future, raising hopes that we might finally see the first signs of an economy boost before the year ends. It’s important to note what Alcoa says because, like Caterpillar, its future depends a lot on China.

Although the industry hasn’t really picked up, Cat’s numbers could look better on a year-over-year basis for the third and fourth quarters, particularly in comparison to its first two quarters. That’s because the construction industry in China actually started slowing down around this time last year. In its third quarter 2011, except for China, sales in Cat’s construction division were at or above record levels across most of its major markets.

Someone's showing off!

If numbers don’t impress you, Cat’s milestones in the past three months should. The company opened its 1.1 million-square-foot hydraulic excavator plant in Texas that will increase its excavator capacity in the U.S. by nearly three times once it reaches full capacity. Cat also announced plans to set up a center for distribution of parts in Australia, which is in addition to six other such centers coming up globally.

What will likely be discussed in depth is the company’s exhibit at the recently held MINExpo in Las Vegas, the same exhibition at which it gave its tepid 2015 outlook. Cat lived up to its name and size by putting on display the largest line of mining equipment among 1,900 companies. The event was special for two reasons: one, it coincided with Cat’s completion of one full year of the Bucyrus acquisition, and two, it was this acquisition which enabled it to snatch away the crown of the company with the biggest mining product range  from Joy Global.

Of projections and contradictions

At the same Expo, Cat also displayed the first-of-its-kind hybrid (diesel-electric) shovel, and proudly showed off the bright yellow, 420,000 pound Electro-Motive Diesel locomotive that is enough to give any competitor (and you’ll know which one I have in mind in just a few seconds) sleepless nights. This part of business belongs to Cat’s third division, power systems, which I think should do well in the third quarter backed by robust demand for rail locomotives. Established player General Electric’s (NYSE: GE) transportation unit’s sales climbed 27% in its last quarter as higher demand for locomotives helped offset weak orders from mining customers. GE shipped 243 locomotives compared to 163 in the year-ago period.  

Which also reminds me: while Cat cut back it's outlook at MINExpo, GE stunned many by announcing plans to set up a separate mining division that will enable it to double its revenue from the mining business over the next few years. Talk about projections!

The Foolish bottom line

I am upbeat about Caterpillar's third-quarter numbers. But if by any chance it disappoints the Street next week (though I don’t see that coming), think of it as an opportunity to get your hands on a solid stock. It's a fundamentally strong company, and poised to weather any storm. To make sure you don’t miss its earnings updates, news and analysis, click here to add Caterpillar to your stock watchlist.

While waiting for its earnings report, won’t it be great if you get a chance to know Caterpillar in depth? Read all about Caterpillar's strengths and weaknesses in our brand new report. Just click here to access it now.

Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of General Electric Company and Joy Global. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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