Why Caterpillar (CAT) Might be Well Poised for a Surge

Investors might want to bet on Caterpillar (CAT), as earnings estimates for this company have been showing solid improvement lately. The stock has already gained solid short-term price momentum, and this trend might continue with its still improving earnings outlook.

The upward trend in estimate revisions for this construction equipment company reflects growing optimism of analysts on its earnings prospects, which should get reflected in its stock price. After all, empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements. Our stock rating tool -- the Zacks Rank -- is principally built on this insight.

The five-grade Zacks Rank system, which ranges from a Zacks Rank #1 (Strong Buy) to a Zacks Rank #5 (Strong Sell), has an impressive externally-audited track record of outperformance, with Zacks #1 Ranked stocks generating an average annual return of +25% since 2008.

For Caterpillar, strong agreement among the covering analysts in revising earnings estimates upward has resulted in meaningful improvement in consensus estimates for the next quarter and full year.

The chart below shows the evolution of forward 12-month Zacks Consensus EPS estimate:

12 Month EPS

Current-Quarter Estimate Revisions

The company is expected to earn $6.93 per share for the current quarter, which represents a year-over-year change of +40.0%.

Over the last 30 days, seven estimates have moved higher for Caterpillar while one has gone lower. As a result, the Zacks Consensus Estimate has increased 5.3%.

Current-Year Estimate Revisions

For the full year, the earnings estimate of $27.14 per share represents a change of +42.4% from the year-ago number.

In terms of estimate revisions, the trend for the current year also appears quite encouraging for Caterpillar. Over the past month, 13 estimates have moved higher compared to no negative revisions, helping the consensus estimate increase 9.14%.

Favorable Zacks Rank

The promising estimate revisions have helped Caterpillar earn a Zacks Rank #1 (Strong Buy). The Zacks Rank is a tried-and-tested rating tool that helps investors effectively harness the power of earnings estimate revisions and make the right investment decision.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Our research shows that stocks with Zacks Rank #1 (Strong Buy) and 2 (Buy) significantly outperform the S&P 500.

Bottom Line

Investors have been betting on Caterpillar because of its solid estimate revisions, as evident from the stock's 5% gain over the past four weeks. As its earnings growth prospects might push the stock higher, you may consider adding it to your portfolio right away.

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This article originally published on Zacks Investment Research (zacks.com).

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