Shares of Caterpillar (CAT) are advancing following a Bank of America upgrade of the construction equipment manufacturer ahead of its next earnings report, which is predicted to be another "beat and raise," and a potential dividend increase.

WHAT'S NEW: Bank of America Merrill Lynch analyst Ross Gilardi upgraded Caterpillar to Buy from Neutral and raised his price target on the shares to $120 from $105, citing the company's continued acceleration of monthly retail sales, a potential dividend raise over the summer, his expectations for another big beat and raise in July and the chance that the company's September investor day meeting will provide a further catalyst. Caterpillar's retail sales "are likely to serve as a positive catalyst through the year" as end-user machinery demand continues to increase and investors should expect another big beat in the second quarter as Caterpillar's fiscal year 2017 outlook "seems conservative," Gilardi wrote. He added that there are increasing chances of Caterpillar raising its dividend over the summer as the company "gains confidence in an inflection point" and it looks to shift capital allocation priorities from balance sheet preservation to the dividend and more active M&A. The company's investor day, which is the first in four years and will be hosted under new CEO Jim Umpleby, will focus on more disciplined capital spending, returns, sustainable dividend increases, small to mid-sized M&A, pricing over volume, reduced cyclicality, the company's digital opportunity, and a refocus on the rental strategy, the analyst wrote.

WHAT'S NOTABLE: Wells Fargo analyst Andrew Casey maintained an Outperform rating on Caterpillar in April, saying the first quarter of 2017 is the first in a string of quarters in which Caterpillar should realize higher earnings power as backlog growth should continue driven by end market demand, end market growth and a reversal of inventory restocking. Casey also raised his price target range on the stock to $120-$123 from $116-119. Credit Suisse analyst Jamie Cook also maintained an Outperform rating and raised Caterpillar's target price to $123 from $111 after earnings in April, saying the company gave "conservative guidance" and was "off to a great start and set up well for 2017."

PRICE ACTION: Shares of Caterpillar are up 1% to $101.39 in afternoon trading.