Caterpillar earnings will 'beat all year long,' Bank of America says

Published Thu, May 11 201710:48 AM EDTUpdated Thu, May 11 20173:12 PM EDT

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

Key Points

Bank of America Merrill Lynch says the Street's expectations for Caterpillar's second quarter are too low.
BofAML upgraded the stock to buy and raised its price target to $120, nearly 20 percent above where Caterpillar closed Wednesday.
The analysts also say Caterpillar could announce a new strategy in September.

Industrial giant Caterpillar is on the cusp of a big year of earnings growth and potential new business strategy, Bank of America Merrill Lynch analysts said Thursday. BofAML upgraded the stock to buy from neutral and raised its price target to $120, nearly 20 percent above where Caterpillar closed Wednesday. The stock, which traded flat Thursday morning, is up 8.2 percent this year, already beating the S & P 500. "CAT is set up to beat all year long," research analysts Ross Gilardi, Michael Feniger and Natalie O'Dea said in the note. They said the consensus estimate for second-quarter adjusted earnings is $1.10 a share, flat from the prior year and down 14 percent from the first quarter. Such a decline is historically rare. Since 1995, Caterpillar's second-quarter earnings have rose an average 35 percent from the prior quarter and only fallen twice, in 2011 and 2015, the BofAML analysts said. They expect second-quarter earnings of $1.28 a share. The analysts said other reasons supporting the case for Caterpillar include: Accelerating monthly retail sales. A potential first dividend raise this summer that alleviates investor concerns about the safety of the roughly 3 percent yield. New CEO Jim Umpleby is expected to lay out a new strategy in September at the company's first investor day in four years that focuses on growth from pricing rather than simply growing market share. Caterpillar's director of investor relations, Amy Campbell, said Wednesday at a Wells Fargo Conference that one of Umpleby's aims is to look for more profitable ways to deploy resources and deal with business lines that aren't making money, according to a rough transcript the industrial company provided CNBC. Caterpillar declined to comment on the potential for a dividend increase. In its first-quarter earnings report in April, Caterpillar crushed estimates with earnings per share of $1.28 and posted its first year-over-year sales increase in more than two years, helped by a jump in China sales. The Dow component also raised its guidance well above estimates to full-year earnings of $3.75 a share. BofAML is even more optimistic than Caterpillar and expects 2017 earnings of $4.30 a share. Disclaimer

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Industrial giant Caterpillar is on the cusp of a big year of earnings growth and potential new business strategy, Bank of America Merrill Lynch analysts said Thursday.

BofAML upgraded the stock to buy from neutral and raised its price target to $120, nearly 20 percent above where Caterpillar closed Wednesday. The stock, which traded flat Thursday morning, is up 8.2 percent this year, already beating the S&P 500.

"CAT is set up to beat all year long," research analysts Ross Gilardi, Michael Feniger and Natalie O'Dea said in the note. They said the consensus estimate for second-quarter adjusted earnings is $1.10 a share, flat from the prior year and down 14 percent from the first quarter.

Such a decline is historically rare. Since 1995, Caterpillar's second-quarter earnings have rose an average 35 percent from the prior quarter and only fallen twice, in 2011 and 2015, the BofAML analysts said. They expect second-quarter earnings of $1.28 a share.

The analysts said other reasons supporting the case for Caterpillar include: