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Caterpillar (CAT) Rides on Cost Savings and Improving Markets
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Caterpillar Inc. (CAT - Free Report) is expected to gain on strong demand in China and pickup in global manufacturing activity. Strength in construction demand can drive the Construction Industries segment while Resource Industries segment is expected to gain on improving commodity prices. Further, a robust liquidity position, investments in expanded offerings, services and digital initiatives are expected to fuel growth for the company.
Improving End Markets to Fuel Revenues
Caterpillar had been witnessing declines in both its top and bottom lines in all the four quarters of 2020, mainly due to the COVID-19 pandemic which thwarted demand in most of its markets. However, the company delivered an improved performance in the first quarter of 2021 on the back of resumption of global economic activities and improving demand in its end markets. Notably, Caterpillar’s earnings surged 74% year over year to $2.87 in the quarter. Backlog at the end of the quarter was at $16.9 billion, up $2.7 billion on a sequential basis and $2.8 billion on a year-over-year basis.
The pickup in global industrial activity is likely to contribute to Caterpillar’s top-line performance in the coming quarters. In North America, the ongoing strength in residential activity can boost demand for Caterpillar’s construction equipment. Non-residential construction is expected to recover at a gradual pace throughout the year. In China, the outlook for the construction sector holds promise, backed by government spending on infrastructure and building activity. Demand in also improving in Europe. In Latin America, Brazil's construction sector is expected to support machine demand.
The Resource Industries segment is witnessing higher order levels on the back of improving metal prices. Further, due to the uncertainty associated earlier with the pandemic, several miners had deferred rebuilds and maintenances from 2020 to 2021, which is expected to aid the segment’s performance this year. The company also expects a recovery in heavy construction, and quarry and aggregates from their low levels in 2020. In the Energy & Transportation segment, the company anticipates some improvement in power generation supported by data center activity. It also expects sales to improve in transportation, courtesy of increase in rail services and international businesses.
Liquidity, Cost-Saving Actions to Aid Growth
In the first quarter of 2021, Caterpillar generated Machinery, Energy & Transportation (ME&T) robust free cash flow of $1.7 billion and remains on track to deliver its ME&T free cash flow target of $4 billion to $8 billion for 2021. Its cash and liquidity position remains strong with the company ending first-quarter 2021 with cash and short-term investments of $11.3 billion. ME&T debt at the end of the quarter stood at $11.05 billion. Caterpillar’s current ratio is at 1.60 and times interest earned ratio is currently at 5.1. These figures indicate that the company is in a good position to meet its debt obligations.
Also, in the wake of the coronavirus crisis, the company has been taking actions to reduce costs. This will help sustain margins. Further, the company’s restructuring efforts in 2020 made good progress and it expects a benefit of $150 million in 2021 from these actions.
Strategic Moves in Place
Caterpillar continues to focus on customers and on the future by continuing to invest in digital capabilities, connecting assets and job sites, along with developing the next generation of more productive and efficient products. The company plans to fund initiatives that drive long-term profitable growth focused on areas of expanded offerings and services, and digital initiatives like e-commerce. In sync with this, Caterpillar launched the new GX line of excavators in China in November 2020, which has been received well by customers. The GX Series provides durability, safety and services, and 15% lower fuel consumption than the earlier models. It also offers 25% lower maintenance cost.
The company displayed some of its mining technology at the Consumer Electronics Show for the first time. It featured Cat MineStar, a suite of technology and solutions that powers its autonomous trucks. Cat MineStar ensures safety and efficiency while operations are more consistent and productive. Customers have realized productivity increases of up to 30% with zero reportable injuries. The company’s autonomous capabilities provide it with a competitive edge in mining.
Price Performance
Year to date, Caterpillar stock has gained 32.4% compared with the industry’s rally of 32.9%.
Some other top-ranked stocks in the industrial products sector are Tennant Company (TNC - Free Report) , Encore Wire Corporation (WIRE - Free Report) and Arconic Corporation . All of these stocks sport a Zacks Rank #1 at present.
Tennant Company has an expected earnings growth rate of 49.5% for the current fiscal year. The company’s shares have gained around 18% year to date.
Encore Wire has an estimated earnings growth rate of 49.5% for the current fiscal year. Year to date, the company’s shares have rallied nearly 36%.
Arconic has a projected earnings growth rate of 447% for the current fiscal year. The stock has appreciated around 21% so far this year.
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Caterpillar (CAT) Rides on Cost Savings and Improving Markets
Caterpillar Inc. (CAT - Free Report) is expected to gain on strong demand in China and pickup in global manufacturing activity. Strength in construction demand can drive the Construction Industries segment while Resource Industries segment is expected to gain on improving commodity prices. Further, a robust liquidity position, investments in expanded offerings, services and digital initiatives are expected to fuel growth for the company.
Improving End Markets to Fuel Revenues
Caterpillar had been witnessing declines in both its top and bottom lines in all the four quarters of 2020, mainly due to the COVID-19 pandemic which thwarted demand in most of its markets. However, the company delivered an improved performance in the first quarter of 2021 on the back of resumption of global economic activities and improving demand in its end markets. Notably, Caterpillar’s earnings surged 74% year over year to $2.87 in the quarter. Backlog at the end of the quarter was at $16.9 billion, up $2.7 billion on a sequential basis and $2.8 billion on a year-over-year basis.
The pickup in global industrial activity is likely to contribute to Caterpillar’s top-line performance in the coming quarters. In North America, the ongoing strength in residential activity can boost demand for Caterpillar’s construction equipment. Non-residential construction is expected to recover at a gradual pace throughout the year. In China, the outlook for the construction sector holds promise, backed by government spending on infrastructure and building activity. Demand in also improving in Europe. In Latin America, Brazil's construction sector is expected to support machine demand.
The Resource Industries segment is witnessing higher order levels on the back of improving metal prices. Further, due to the uncertainty associated earlier with the pandemic, several miners had deferred rebuilds and maintenances from 2020 to 2021, which is expected to aid the segment’s performance this year. The company also expects a recovery in heavy construction, and quarry and aggregates from their low levels in 2020. In the Energy & Transportation segment, the company anticipates some improvement in power generation supported by data center activity. It also expects sales to improve in transportation, courtesy of increase in rail services and international businesses.
Liquidity, Cost-Saving Actions to Aid Growth
In the first quarter of 2021, Caterpillar generated Machinery, Energy & Transportation (ME&T) robust free cash flow of $1.7 billion and remains on track to deliver its ME&T free cash flow target of $4 billion to $8 billion for 2021. Its cash and liquidity position remains strong with the company ending first-quarter 2021 with cash and short-term investments of $11.3 billion. ME&T debt at the end of the quarter stood at $11.05 billion. Caterpillar’s current ratio is at 1.60 and times interest earned ratio is currently at 5.1. These figures indicate that the company is in a good position to meet its debt obligations.
Also, in the wake of the coronavirus crisis, the company has been taking actions to reduce costs. This will help sustain margins. Further, the company’s restructuring efforts in 2020 made good progress and it expects a benefit of $150 million in 2021 from these actions.
Strategic Moves in Place
Caterpillar continues to focus on customers and on the future by continuing to invest in digital capabilities, connecting assets and job sites, along with developing the next generation of more productive and efficient products. The company plans to fund initiatives that drive long-term profitable growth focused on areas of expanded offerings and services, and digital initiatives like e-commerce. In sync with this, Caterpillar launched the new GX line of excavators in China in November 2020, which has been received well by customers. The GX Series provides durability, safety and services, and 15% lower fuel consumption than the earlier models. It also offers 25% lower maintenance cost.
The company displayed some of its mining technology at the Consumer Electronics Show for the first time. It featured Cat MineStar, a suite of technology and solutions that powers its autonomous trucks. Cat MineStar ensures safety and efficiency while operations are more consistent and productive. Customers have realized productivity increases of up to 30% with zero reportable injuries. The company’s autonomous capabilities provide it with a competitive edge in mining.
Price Performance
Year to date, Caterpillar stock has gained 32.4% compared with the industry’s rally of 32.9%.
Zacks Rank & Other Stocks to Consider
Caterpillar currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some other top-ranked stocks in the industrial products sector are Tennant Company (TNC - Free Report) , Encore Wire Corporation (WIRE - Free Report) and Arconic Corporation . All of these stocks sport a Zacks Rank #1 at present.
Tennant Company has an expected earnings growth rate of 49.5% for the current fiscal year. The company’s shares have gained around 18% year to date.
Encore Wire has an estimated earnings growth rate of 49.5% for the current fiscal year. Year to date, the company’s shares have rallied nearly 36%.
Arconic has a projected earnings growth rate of 447% for the current fiscal year. The stock has appreciated around 21% so far this year.
Time to Invest in Legal Marijuana
If you’re looking for big gains, there couldn’t be a better time to get in on a young industry primed to skyrocket from $17.7 billion back in 2019 to an expected $73.6 billion by 2027.
After a clean sweep of 6 election referendums in 5 states, pot is now legal in 36 states plus D.C. Federal legalization is expected soon and that could be a still greater bonanza for investors. Even before the latest wave of legalization, Zacks Investment Research has recommended pot stocks that have shot up as high as +285.9%.
You’re invited to check out Zacks’ Marijuana Moneymakers: An Investor’s Guide. It features a timely Watch List of pot stocks and ETFs with exceptional growth potential.
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