Caterpillar (CAT) is one of the leading mobile machinery manufacturers in the world. The company’s stock price is often considered a proxy for global growth. 

The post-pandemic economy has been positive for CAT due to higher levels of infrastructure spending, a strong housing market, a recovery in the industrial sector, and high levels of CAPEX that are expected to persist over the next decade. As a result, CAT’s stock is up more than 130% from its lows in March 2020. 

Despite these gains, the stock remains attractively priced with a price-to-earnings ratio (P/E) that is below the S&P 500. Longer-term fundamentals remain bullish, and the 20% dip in the stock price is providing a good entry point from a risk/reward perspective. 

Growth

CAT’s recent earnings results show considerable earnings momentum. The company topped earnings expectations by a significant margin at $2.66 vs $2.26. This was a 75% increase from the previous year. The company said that increased pricing power due to high demand offset rising costs of materials and labor. 

The company noted that its costs were 25% higher, however, margins actually increased. Overall, the operating margin for Q3 came in at 13.7%, a meaningful improvement from last year’s 10.1%. Following this earnings report, there have been about 7 positive EPS revisions for Q4 and 2022. Overall, both estimates have increased by about 10% in the last 3 months and analysts expect about 24% EPS growth next year.

There are good reasons to believe that this figure can be exceeded given strength in CAT’s end markets such as housing, commodities, infrastructure projects, and the industrial sector. Further, CAPEX is expected to trend higher over the next decade as the economy’s next major challenge is to increase capacity and make the supply chain more resilient.  

Value

CAT will be a major beneficiary of these trends. However, share prices don’t really reflect this upside especially as the company’s earnings estimates have increased over the last 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, compared to 21. It also pays a higher dividend than the S&P 500 at 2.2% vs 1.3%. 

Wall Street analysts are also bullish on the stock as it has a consensus price target of $267 which implies 19% more upside. 9 out of 13 analysts covering the stock have a Buy rating. The highest price target on the stock is from 5 star analyst Mircea Dobre of Robert W. Baird who has a $270 price target. 

POWR Ratings

Given this attractive growth and value profile, it’s not surprising that CAT is rated a B according to the POWR Ratings which implies a Buy rating. B-rated stocks have posted an average annual performance of 19.7% which compares favorably to the S&P 500’s average annual performance of 7.1%. 

The POWR Ratings also evaluates stocks by different components to give additional insight. Interestingly, CAT has a B rating for Growth, Quality, and Momentum. Growth and quality are consistent with its strong earnings report and bullish Wall Street targets. The stock also has a strong momentum score with its 32% gain over the last year.

The POWR Ratings also provides component grades for other categories like Value, Growth, Stability, Sentiment, Industry, and Quality. To see VRA’s POWR Ratings, click here. 

Conclusion

The last decade was marked by interest rates trending lower, weak global growth, deflationary trends in commodity prices, low CAPEX, and an industrial sector that was operating below capacity. In many ways, the post-COVID economy has been an inversion of these developments. 

Commodity prices are at multi-year highs, while governments are using fiscal stimulus to increase the economy’s capacity. Businesses are projected to spend increasing amounts of CAPEX, which should boost global growth. All of these projects require heavy machinery from companies like CAT which should see its stock be a market leader as long as these conditions persist.

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CAT shares were trading at $204.92 per share on Monday morning, up $0.91 (+0.45%). Year-to-date, CAT has gained 14.93%, versus a 24.35% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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