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Can Caterpillar’s EPS Beat Analysts’ Estimates in Q4?

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Caterpillar’s adjusted EPS

Analysts expect Caterpillar (CAT) to post an adjusted EPS of $2.98 in the four quarter—an increase of ~38% compared to the fourth quarter of 2017. In the fourth quarter of 2017, Caterpillar reported an adjusted EPS of $2.16. The company has beat analysts’ estimates in the past seven quarters. Caterpillar is set to repeat its strong performance in the fourth quarter as well.

Caterpillar’s projected adjusted EPS growth is expected to be driven by higher revenue growth and benefits from restructuring costs— specifically, selling, general, and distribution expenses and share buybacks.

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The company’s growing workforce and higher raw material prices are expected to increase the COGS (cost of goods sold). However, as a percentage of sales, Caterpillar is still expected to report a decline compared to the previous year. Analysts expect Caterpillar’s COGS to be ~$9.74 billion in the fourth quarter, which represents 68% of the expected revenues. In the fourth quarter of 2017, Caterpillar’s COGS was ~68.9% of its revenues, which implies a difference of 90 basis points YoY (year-over-year).

The biggest gain is expected to be from the company’s SG&A (selling, general, and administrative) expenses. The SG&A expenses for the fourth quarter are projected to be $1.50 billion, which represents 10.5% of the projected sales—compared to 13.2% of the sales in the third quarter of 2017. The SG&A projection shows a contraction of 270 basis points YoY. Another factor that could help Caterpillar’s adjusted EPS is its lower tax rate due to the new tax laws.

Share repurchases

In the third quarter, Caterpillar spent $750 million on share repurchases. At the end of the third quarter, Caterpillar had 596.4 million outstanding shares. With share prices at a relatively lower price, we can expect the buybacks to continue. Analysts expect the outstanding shares at the end of the fourth quarter to be at ~594.86 million shares.

Investors could hold Caterpillar indirectly by investing in the Industrial Select Sector SPDR ETF (XLI), which invests 3.7% of its portfolio in Caterpillar. XLI also holds Boeing (BA), 3M (MMM), and Honeywell (HON) with weights of 9.0%, 5.3%, and 5.0%, respectively, as of January 24.

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