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What Can You Expect from Caterpillar’s 4Q16 Earnings?

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What Can You Expect from Caterpillar’s 4Q16 Earnings? PART 1 OF 5

What Factors Could Drive Caterpillar Stock in 2017?

Series overview

Caterpillar (CAT) plans to announce its fiscal 2016 and 4Q16 earning results on January 26, 2017, before market hours. In this series, we’ll look at analyst expectations for CAT’s 4Q16 earnings as well as the factors that led analysts to arrive at those expectations.

We’ll also discuss the company’s updated earnings guidance for 2016 and the key indicators that investors should consider in the upcoming earnings release.

What Factors Could Drive Caterpillar Stock in 2017?

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Caterpillar’s 2016 stock performance

Investors who took positions in Caterpillar (CAT) at the beginning of 2016 would have made 36% on their investments by the end of the year. During the same period, the S&P 500 rose about 11%.

Selection bias is inherent in this calculation, as investors who had taken positions on Caterpillar five years ago have hardly received any capital gains over the years. Currently, Caterpillar is trading at a trailing PE (price-to-earnings) multiple of 54.6x—more than twice its five-year average multiple of 24.4x.

Returns for some of Caterpillar’s peers are better than the market as well. AGCO (AGCO) yielded about 29% in 2016. During the same period, Deere & Company (DE) yielded capital gains of 35%. Astec Industries (ASTE) gained nearly 71%.

Currently, AGCO is trading at a trailing PE multiple of 31.5x—a five-year high. Its average PE ratio in the last five years has been 10.8x. Deere’s PE multiple of 21.9x compared to its average five-year multiple is 11.5x.

Driving factors in 2017

According to company filings, CAT expects its 2017 sales and revenues to be close to that of its 2016 levels. However, sustained mined commodity prices, improved market position in China, and the anticipated infrastructure (IGF) spending by the incoming US President Trump could drive Caterpillar stock in 2017. Also, company’s continued emphasis on cost-cutting measures could aid its margins moving ahead.

Next, let’s discuss how analysts are rating Caterpillar.

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