Back to top

Image: Bigstock

Reasons to Add Caterpillar (CAT) Stock to Your Portfolio

Read MoreHide Full Article

Caterpillar Inc. (CAT - Free Report) impressed investors by delivering growth in both its top and the bottom line for the last few quarters despite inflationary pressures and supply-chain snarls. This was aided by improving demand in its end markets and cost-control efforts. A strong liquidity position, and CAT’s ongoing investments in its expanded offerings, services and digital initiatives are also expected to contribute to growth.

Caterpillar currently has a Zacks Rank #2 (Buy) and a VGM Score of A. Our research shows that stocks with a VGM Score of A or B combined with a Zacks Rank #1 (Strong Buy) or 2 offer the best investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s delve deeper and analyze the factors that make this stock an attractive bet.

Solid Q3 Results & Robust Backlog Levels: Caterpillar’s adjusted earnings per share were $3.95 in third-quarter 2022, surpassing the Zacks Consensus Estimate of $3.19. The bottom-line figure marked a 48.5% improvement year over year. Strong demand across its most end markets and a favorable price realization led to improved earnings despite unfavorable manufacturing costs (mainly higher material and freight costs) in the quarter. The backlog at the end of the said quarter was an impressive $30 billion. This bodes well for CAT’s top-line performance in the days ahead.

Positive Earnings Surprise History: Caterpillar’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average being 14.7%.

Healthy Growth Projections: The Zacks Consensus Estimate for 2022 earnings is currently pegged at $13.77, suggesting growth of 27.4% from the year-ago reported figure. The consensus mark for fiscal 2023 earnings stands at $14.89, indicating an improvement of 8% from the prior-year reported number. Caterpillar has an estimated long-term earnings growth rate of 12%.

Strong Demand to Fuel Top Line

In North America, demand in both residential and non-residential construction sectors is likely to bolster demand for Caterpillar’s construction equipment. The perked-up investment in roads, bridges, airports and waterways as a result of the U.S. Infrastructure Investment and Jobs Act represents a huge opportunity for CAT.

In the Asia Pacific (barring China) region, higher commodity prices, housing strength and increased government spending on infrastructure will support construction equipment sales. Increased construction activity will drive machine demand in EAME and Latin America.

In Resource Industries, mining orders are on an uptrend, auguring well for the Resource Industries segment. Miners are increasingly relying on autonomous systems to enhance productivity, and reduce costs and emissions. Therefore, Caterpillar is enhancing its autonomous capabilities and bringing innovative products to the market.

In the Energy & Transportation segment, strong order rates in most applications are expected to support revenues in 2022. Industrial is anticipated to witness growth, with activity strengthening across most applications.

Strong Balance Sheet

Caterpillar expects to deliver free cash flow between $4 billion and $8 billion for the Machinery, Energy & Transportation (ME&T) segment this year. Its cash and liquidity position remains strong, as CAT ended the third quarter of 2022 with cash and short-term investments of $6.3 billion. ME&T debt stood at $9.6 billion. Its times interest earned ratio has improved substantially over the years and is currently 11.

Earlier this year, CAT hiked its quarterly dividend 8% to $1.20 per share. Evidently, it maintained its status as a dividend aristocrat, continuing its streak of paying higher dividends to its shareholders for 28 straight years. Its dividend yield and the payout ratio are higher than its peers. Over the past four years, CAT has returned an average of 99% of its ME&T free cash flow to its shareholders, in sync with its target of returning all its ME&T free cash flow to the shareholders over time.

Growth Strategies in Place

Caterpillar continues to focus on customers and the future by steadily investing in digital capabilities, connecting assets and job sites, and developing next-generation productive and efficient products. CAT is consistently investing in expanding its offerings and services, and digital initiatives like e-commerce to drive long-term growth.

Price Performance

Zacks Investment Research
Image Source: Zacks Investment Research

Shares of Caterpillar have gained 20.3% in the past year compared with the industry’s growth of 17.8%.

Other Stocks to Consider

Some other top-ranked stocks in the Industrial Products sector are Enerpac Tool Group (EPAC - Free Report) , Hubbell (HUBB - Free Report) and W.W. Grainger (GWW - Free Report) . While EPAC and HUBB sport a Zacks Rank of 1, GWW holds a Zacks Rank of 2 at present.

Enerpac Tool Group has an earnings growth estimate of 44.6% for the current year. The estimates have been unchanged over the past 30 days. EPAC’s shares have rallied 14.6% over the year. It has a trailing four-quarter surprise of 3.4%, on average.
Hubbell has an average trailing four-quarter earnings surprise of 10.6%. The stock has gained 28.4% in the past year. HUBB’s earnings growth estimate for fiscal 2022 is 6.7%. The consensus mark has been revised 4.8% upward in the past 30 days.
W.W. Grainger has a trailing four-quarter surprise of 10.1%, on average. The Zacks Consensus Estimate for GWW’s 2022 earnings stands at 16.6% growth from the year-ago reported number. The consensus estimate has increased 4.1% over the past 30 days. The stock has jumped 22% in the past year.

Published in