By Al Root

April 23, 2019 - Stock in Caterpillar is trailing other large industrial companies this year. Its first-quarter results, due out Wednesday before the market opens, could shed light on whether dour investor sentiment will shift.

The stock is up 11% year to date, worse than the 14% gain in the Dow Jones Industrial Average and much worse than the 21% gain in the Industrial Select Sector SPDR ETF (ticker: XLI). The shares also trade for less than 12 times estimated 2019 earnings, a 40% discount to their historical average.

Caterpillar manufactures earth-moving equipment used in mining and construction.

Photo by Scott Olson/Getty Images

Investors are right to be a little skittish. Caterpillar stock hasn’t reacted well to earnings reports in the recent past, dropping on the day of the last four quarterly reports—falling 9% in January when lower than expected fourth-quarter earnings spooked investors.

“Investors’ primary focus has been where are we in the cycle for each of its businesses,” writes JP Morgan analyst Ann Duignan. “Given the $4 [billion spent] on restructuring since 2014, what levers can management pull in the next downturn?” Duignan rates shares Outperform with a $172 price target.

Those are the two big issues facing Caterpillar stock: the business cycle and what earnings will do in a downturn. In prior recessions, Caterpillar per-share earnings have declined by 50% to 60%. Both issues will loom large when Caterpillar updates investors this week.

As earnings approach, here are some key points to watch, along with some recent history.

• Wall Street expects the company to report $2.82 in adjusted earnings per share from $13.4 billion in sales.

• Caterpillar is a bellwether stock for China, and the state of the Chinese economy also looms large on investors’ minds. Chinese manufacturing activity contracted in three of the last four months. Still, optimistic investors hope Chinese government stimulus will boost demand once the U.S. and China agree on a new trade pact.

• Caterpillar’s mining business should be in good shape. Capital spending by mining companies continues to grow. Duignan writes that mining capital spending peaked in 2013 at $103 billion and hit a trough in 2017 at $39 billion. Now spending is expected to grow for the second straight year in 2019.

• Mining gains are offsetting peak construction activity. Total U.S. construction spending surpassed $1.3 trillion on an annualized basis in February, according to the U.S. Census Bureau. High spending is good, but spending growth is decelerating, causing some investors to fear that a domestic construction peak has arrived. Deutsche Bank analyst Chad Dillard cut his rating on Caterpillar stock from Buy to Hold on April 2. He worries the U.S. is saturated with construction equipment. 

• Finally, Caterpillar earnings guidance for the full year is $12.25 a share. That guidance was given in January and management reiterated the number in February.