Caterpillar remains a businessman after strong earnings report
Caterpillar (CAT) is one of the leading manufacturers of mobile work machines worldwide. The company’s share price is often viewed as a proxy for global growth.
The post-pandemic economy was positive for CAT due to higher infrastructure spending, a strong housing market, a recovery in the industrial sector, and high capital spending that is expected to continue over the next decade. As a result, CAT stock is up more than 130% from its March 2020 lows.
Despite these gains, the stock remains attractively valued with a price-earnings ratio (P / E) below the S&P 500. The longer-term fundamentals remain bullish and the 20% decline in the stock price provides a good entry point from a risk / reward perspective.
CAT’s latest earnings figures show considerable earnings momentum. The company significantly outperformed earnings expectations at $ 2.66 versus $ 2.26. That was 75% more than in the previous year. The company said the increased pricing power due to high demand was able to offset rising material and labor costs.
The company found that its costs were 25% higher, but margins actually increased. Overall, the operating margin in the third quarter was 13.7%, a significant improvement compared to 10.1% in the previous year. According to this earnings report, there have been about 7 positive EPS revisions for the fourth quarter and 2022. Overall, both estimates have increased about 10% over the past 3 months and analysts expect EPS growth of about 24% over the next year.
There are good reasons to believe that given the strength in CAT end markets such as housing, raw materials, infrastructure projects and the industrial sector, this number may be exceeded. In addition, capital spending is expected to increase over the next decade as the next big challenge for the economy is to increase capacity and make the supply chain more resilient.
CAT will be a big beneficiary of these trends. However, stock prices don’t really reflect this uptrend, especially since the company’s earnings estimates have risen over the past 3 months while the stock price is 20% lower. On a valuation basis, CAT is cheaper than the S&P 500 with a forward P / E of 16.6 versus 21. It also pays a higher dividend than the S&P 500 at 2.2% versus 1.3%.
Wall Street analysts are also bullish on the stock as it has a consensus price target of $ 267, which means 19% more upside. 9 out of 13 analysts who cover the stock have a buy rating. The highest price target for the stock comes from 5-star analyst Mircea Dobre of Robert W. Baird, who has a price target of $ 270.
Given this attractive growth and value profile, it is not surprising that CAT has been recognized according to the POWR ratings what a purchase rating implies. B-rated stocks have achieved an average annual performance of 19.7%, which is cheap compared to the S&P 500’s average annual performance of 7.1%.
The POWR Ratings also rates stocks according to various components for additional insight. Interestingly, CAT has a B rating for growth, quality and dynamism. Growth and quality are in line with the strong earnings report and bullish Wall Street targets. The stock also has a strong momentum score, up 32% last year.
The POWR ratings also provide component ratings for other categories such as value, growth, stability, sentiment, industry, and quality. To view VRA’s POWR ratings, click here.
The last decade has been marked by lower interest rates, weak global growth, deflationary trends in commodity prices, low capital spending and an underutilized industrial sector. In many ways, the post-COVID economy was a reversal of these developments.
Commodity prices are at multi-year highs as governments use fiscal incentives to improve economic performance. It is predicted that companies will increasingly issue CAPEX, which should fuel global growth. All of these projects require heavy machinery from companies like CAT that should see their stocks as leaders as long as these conditions persist.
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CAT shares traded at $ 204.92 per share on Monday morning, up $ 0.91 (+ 0.45%). Since the beginning of the year, CAT is up 14.93%, compared to a 24.35% increase in the reference index S&P 500 over the same period.
About the author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. Its aim is to help readers identify risks and opportunities in the markets. He is Chief Growth Strategist for StockNews.com and publisher of the POWR Growth and POWR Stocks Under $ 10 newsletters. Find out more about Jaimini’s background, as well as links to his latest articles. More…