Headquartered in Deerfield, Illinois, Caterpillar, Inc. (CAT) is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company operates primarily through three segments — Construction Industries, Resource Industries and Energy & Transportation, and Financial Products.

CAT’s sales and revenue decreased 23% year-over-year in the third quarter ended September 30, 2020.  The company reported lower sales in its three primary segments across all regions. However, on hopes of a gradual economic recovery and with that an increase in demand for its products, the stock has been hitting new all-time highs lately. Over the past six months, the stock has rallied more than 50% to close yesterday’s trading session at $195.89, after hitting its all-time high of $200.17.

CAT ended the third quarter with $9.3 billion of enterprise cash and more than $14 billion in liquidity sources. With a strong balance sheet and a focus on expanding its offerings, we expect CAT to continue rallying in the coming months. This impressive performance and potential upside based on several factors have helped the stock earn a “Strong Buy” rating in our proprietary rating system.

Here is how our proprietary POWR Ratings system evaluates CAT:

Trade Grade: A

CAT is currently trading above its 50-day and 200-day moving averages of $180.93 and $156.46, respectively, indicating an uptrend. Moreover, CAT has gained 20.8% over the past three months, reflecting solid short-term bullishness.

The company’s operating profit for the third quarter ended September 30, 2020 increased 25.6% sequentially to $985 million. Its total profit increased 45.9% sequentially to $668 million. In the construction industries segment, North America accounted for nearly 44% of total external sales. And its adjusted profit per share increased more than 30% sequentially to $1.34.

CAT voted in December to maintain a quarterly cash dividend of $1.03 per share of common stock, payable on February 19. In  November CAT  was named to the 2020 Dow Jones Sustainability Indices (DJSI) for the 21^st time. The company signed an agreement in October to acquire the Oil & Gas Division of the Weir Group PLC, a Scotland-based global engineering business.

Buy & Hold Grade: A

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade considers,  CAT is  well positioned. The stock is currently trading just 2.1% below its 52-week high of $200.17.

The company’s net revenue has grown at a CAGR of 1.2% over the past three years, while its EBITDA increased at a CAGR of 4.7% over the same  period. Also, its EPS increased at a CAGR of 59.3% over the past three years.

This impressive performance over the years can be attributed to CAT’s strong financial position. In fact, for 27 consecutive years the company has paid higher annual dividends to shareholders.

Peer Grade: A

CAT is currently ranked #1  of 88 stocks in the Industrial – Machinery industry. Other popular stocks in the industrial – machinery group are ABB Ltd (ABB), Eaton Corporation, PLC (ETN), and Rockwell Automation, Inc. (ROK).

With a 33.4% gain, CAT has beaten the returns of these popular industry participants over the past year. ABB, ETN, and ROK have gained 26.2%, 32.2% and 27%, respectively, over the same period.

Industry Rank: B

The Industrial – Machinery industry is ranked #47 of  123 StockNews.com industries. The companies in this industry manufacture and distribute forestry equipment, construction and mining equipment, diesel and natural gas engines, and industrial gas turbines, among other products that are used in an array of industries, including aerospace, automotive, transportation, and food.

As economic activities came to a temporary halt amid the coronavirus pandemic, this industry suffered  a major setback. However, because the coronavirus vaccine roll-out has started, investors are hopeful about the economy gradually recovering, which should drive  a rise in demand for the products and services of companies in this industry.

Overall POWR Rating: A (Strong Buy)

CAT is rated “Strong Buy” due to its short and long-term bullishness, solid growth prospects, and underlying industry strength, as determined by the four components of our overall POWR Rating.

Bottom Line

We think CAT has plenty of upside  despite hitting new all-time highs, based on its continued business growth, favorable earnings outlook, and strong financials.

Analyst sentiment, which gives a good sense of a stock’s future price movement, is good for CAT. It has an average broker rating of 1.73, indicating a favorable analyst sentiment. The company’s earnings surprise history looks impressive with it  missing the consensus estimate in just one of the trailing four quarters. The consensus revenue estimate of $45.79 billion for 2021 represents a10.1% increase year-over-year. Its EPS is expected to grow 36.1% in 2021.

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CAT shares were trading at $197.18 per share on Thursday morning, up $1.29 (+0.66%). Year-to-date, CAT has gained 8.33%, versus a 1.77% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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