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Bull of the Day: Caterpillar (CAT)

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Headquartered in Deerfield, IL, Caterpillar (CAT - Free Report) is the world's largest heavy-machinery maker and seen as a bellwether for global economic activity.

The company has benefitted a lot from improving global growth and a weak dollar since it derives more than half its sales from international markets.

Impressive Results

Caterpillar had another strong quarter, beating on both the top and bottom lines. Adjusted earnings of $2.16 per share beat the Zacks Consensus Estimate of $1.77 by 22%. Revenues of $12.9 billion were up 35% and also significantly ahead of the Zacks Consensus Estimate of $11.9 billion.

Better-than-expected performance resulted from momentum in broad based sales recovery.

The management also raised its earnings guidance for the year. “Caterpillar is beginning 2018 with strong sales momentum resulting from strong order rates, lean dealer inventories and an increasing backlog. Additionally, there are positive economic indicators across most of the world and in many of the company’s end markets.”

Positive Impact of Tax Reform

The company said it took a $2.4 billion provision charge due to write-down of net deferred assets and mandatory deemed repatriation of non-US earnings.

It added that the reform would be positive for the company over the long-term by creating a more level playing field with foreign companies and providing greater flexibility to access overseas cash.

Caterpillar expects an effective tax rate of 24% in 2018, down from 28% last year.

Rising Earnings Estimates

Analysts have raised their estimates for the company after excellent earnings. The Zacks Consensus Estimate for the current and the next fiscal year have increased to $8.02 per share and $9.22 per share from $7.94 and $8.72, before the results.

The company has been beating estimates consistently over the past few quarters. The average positive surprise for the past four quarters is 53.1%.


Caterpillar, Inc. Price, Consensus and EPS Surprise

Caterpillar, Inc. Price, Consensus and EPS Surprise | Caterpillar, Inc. Quote

The Bottom Line

In addition to a Zacks Rank #1 (Strong Buy), Zacks Industry rank of 25 out of 265 (top 9%) greatly increases the likelihood of short-to-mid- term outperformance. The stock also has a juicy dividend yield of 1.9%.

The company had to struggle with sluggish demand for many years, but with economic growth picking up in most parts of the world, their outlook has improved substantially.

Earlier this month, the IMF had raised its forecast for world economic growth in 2018 and 2019. And while the timing of Trump’s $1 trillion infrastructure spending plan remains uncertain, Caterpillar is expected to be a big winner from it.


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