Caterpillar Inc. is set to release its third-quarter financial results on Tuesday, prior to the opening bell.

A Mixed Track Record

While Caterpillar has had a strong track record of surpassing earnings expectations, it has also frequently disappointed investors. Out of the past 13 quarters, the company has only missed estimates once. However, it has experienced stock price declines on the day following earnings announcements in 10 out of these 13 quarters, with an average drop of 2.8%. On the other hand, when Caterpillar's results have pleased investors, the stock has rallied with an average gain of 6.9%. Notably, after the second-quarter results were announced on August 1st, the stock surged by 8.9%.

Investor Sentiment and Expectations

Investors seem to be prepared for another potential disappointment. Although the stock saw a 1.9% increase in afternoon trading on Monday, it had been on a downward trend, closing at a four-month low on Friday after seven out of the previous eight sessions resulted in losses. Over these eight sessions, Caterpillar's stock declined by 12.5%, while the Dow Jones Industrial Average lost 4.6%.

Nonetheless, Wall Street analysts hold a different outlook. Earnings and revenue estimates, as well as analyst price targets, have been raised significantly over the past few months, suggesting expectations for another strong report from Caterpillar.

Analysts and Their Insights

CFRA analyst Steward Glickman recently upgraded Caterpillar's stock from hold to buy. While he acknowledged that higher interest rates could negatively impact spending, Glickman remains optimistic about the prospects for nonresidential construction in the United States. He cited renewed Federal spending on infrastructure as a key driver for growth in this sector.

Conclusion

As investors eagerly anticipate Caterpillar's third-quarter results, there is a mix of caution and optimism in the market. With a history of beating earnings expectations and disappointing investors simultaneously, it remains unclear which direction the stock will take after the announcement. However, the positive sentiment expressed by analysts and the upgraded stock rating suggest a potential upside for Caterpillar.

J.P. Morgan Bullish on Caterpillar's Stock

In a recent update, Tami Zakaria from J.P. Morgan shared her optimistic outlook on Caterpillar's stock. Despite a slowdown in residential construction, Zakaria believes that the existing housing shortage will continue to drive demand. Additionally, the nonresidential construction sector remains robust, thanks to the ongoing increase in infrastructure spending.

Zakaria emphasized two important metrics that she will closely monitor: the book-to-bill ratio and machinery, energy and transportation (EM&T) sales to end users (STU). In a client note, she stated, "As long as the book-to-bill ratio remains above 95% in 3Q and STU remains positive, we believe Caterpillar sets up well for 2024."

Key Financial Estimates

Here are the average third-quarter estimates compiled by FactSet for some of Caterpillar's important financial metrics and other noteworthy figures:

• Adjusted earnings per share are expected to reach $4.80, compared to $3.95 from the previous year. The EPS consensus has increased from $4.18 at the end of July, which was just before the release of second-quarter results.
• Revenue is anticipated to rise by 10.5%, reaching $16.57 billion, an increase from $16.01 billion as of the end of July.
• Construction Industries revenue is predicted to grow by 5.2% to $6.60 billion.
• Energy & Transportation revenue is estimated to experience a 5.5% growth, reaching $6.53 billion.
• Resource Industries revenue is projected to climb by 9.9% to $3.39 billion.

Analysts' Price Target

According to a survey conducted by FactSet with 26 analysts, the average stock price target for Caterpillar has increased from $254.57 in July to $288.36. This new target implies a potential upside of approximately 19% from the current levels.