Here's what else you should know about why Caterpillar Inc. (CAT) is a trending stock

caterpillar (CAT) recently made Zacks.com's list of most wanted stocks. Therefore, you may want to consider some of the key factors that could influence the stock's performance in the near future.

Shares of this construction equipment company have returned -5.5% over the past month, while the Zacks S&P 500 Composite has posted a change of -0.5%. The Zacks Manufacturing – Construction and Mining industry, which includes Caterpillar, has lost 5% in the period. The crucial question now is: Where could the share develop in the short term?

While media releases or rumors about a material change in a company's business prospects usually cause the stock to “trend” and result in an immediate price change, there are always some fundamental facts that ultimately drive the buy-and-hold decision determine.

Rather than focusing on anything else, at Zacks we emphasize evaluating changes to a company's earnings outlook. This is because we assume that the fair value of its shares is determined by the present value of its future earnings streams.

Our analysis is essentially based on how sell-side analysts covering the stock revise their earnings estimates to take into account the latest business trends. When a company's earnings estimates rise, the fair value of its shares also rises. And when a stock's fair value is higher than its current market price, investors tend to buy the stock, resulting in an increase in the stock price. Because of this, empirical studies suggest a strong correlation between trends in earnings estimate revisions and near-term stock movements.

Caterpillar is expected to report earnings of $5 per share for the current quarter, a year-over-year change of -4.4%. Over the past 30 days, the Zacks Consensus Estimate has changed 0%.

For the current fiscal year, the consensus earnings estimate of $21.77 suggests a year-over-year change of +2.6%. Over the past 30 days, this estimate has changed by -0.6%.

For the next fiscal year, the consensus earnings estimate of $21.99 represents a +1% change from what Caterpillar was expected to report a year ago. Over the last month, the estimate has changed by -3.7%.

With an impressive, outside-audited track record of success, our proprietary stock ratings tool – the Zacks Rank – is a more meaningful indicator of a stock's near-term price performance because it effectively harnesses the power of earnings estimate revisions. The magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, have resulted in Caterpillar earning a Zacks Rank #3 (Hold).

The following chart shows the evolution of the company's forecast 12-month EPS estimate:

While earnings growth is arguably the best indicator of a company's financial health, nothing as such happens when a company is unable to grow its revenue. After all, it is almost impossible for a company to increase its profits over a long period of time without increasing its sales. Therefore, it is important to know a company's potential revenue growth.

For Caterpillar, the current quarter consensus revenue estimate of $16.62 billion suggests a year-over-year change of -2.7%. For the current and next fiscal years, estimates of $65.32 billion and $65.97 billion suggest changes of -2.6% and +1%, respectively.

Caterpillar reported revenue of $16.11 billion in its most recent reported quarter, a year-over-year change of -4.2%. Earnings per share for the same period were $5.17, compared to $5.52 a year ago.

Compared to the Zacks Consensus Estimate of $16.35 billion, reported revenues represent a surprise of -1.5%. The EPS surprise was -3%.

Over the last four quarters, Caterpillar has topped consensus EPS estimates three times. The company failed to beat consensus revenue estimates in any of the last four quarters.

No investment decision can be efficient without considering a stock's valuation. Whether the current price of a stock accurately reflects the intrinsic value of the underlying business and the company's growth prospects is a key factor in future price performance.

When comparing the current values of a company's valuation multiples, such as: B. Price-earnings ratio (P/E ratio), price-sales ratio (P/S) and price-cash flow (P/CF), with its own values. Historical values can be used to determine whether the stock is fair, overvalued or undervalued is. Comparing the company with its competitors based on these parameters gives a good impression of the appropriateness of the share price.

The Zacks Value Style Score (part of the Zacks Style Scores system), which considers both traditional and unconventional valuation metrics to rank stocks from A to F (an An is better than a B; a B is better than a C); etc.) is very helpful in determining whether a stock is overvalued, correctly valued or temporarily undervalued.

Caterpillar receives a grade of C in this regard, indicating that the company is trading on par with its competitors. Click here to see the values of some of the evaluation metrics that determined this grade.

The facts discussed here and much other information on Zacks.com could help determine whether the market excitement surrounding Caterpillar is worth paying attention to. However, its Zacks Rank #3 suggests that the company could perform in line with the broader market in the near term.

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