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Caterpillar (CAT) and Chevron (CVX): This Week's Growth and Income Stocks

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This week, I discuss Caterpillar (CAT - Free Report) , and Chevron (CVX - Free Report) both of which have solid catalysts for growth going through 2018, and pay a nice annual dividend. 

Caterpillar (CAT - Free Report) posted Q3 earnings results in late October where they easily beat both the top and bottom line expectations for the third consecutive quarter.  The company followed up the impressive earnings results with even better monthly retail sales data for both October and November where it saw sales increases in all segments. 

In October, machinery retail sales saw growth in all geographies; Asia +46%, Latin America +24%, EAME +19%, and North America +7%.  Overall, the segment was up +19%.  In the Resource Industries segment retail sales were up +19% overall with gains in EAME +65%, Asia Pacific +5%, and Latin America +4%.  In the Construction segment retails sales grew by +20% overall with Asia Pacific up +58%, Latin American +35%, North America +10%, EAME +7%.  Lastly in the Energy & Transportation division retail sales grew the most overall +23% with Transport retail up +51%, Industrial +31%, Petroleum +27%, and Power generation +3%.  This news caused estimates for the next 2 quarters and 2 years to be positively revised.

Then in November, management reported that the sales growth got even better during the month.  Machinery retail was up +26%, Energy & Transportation up another +23%, Resource Industry +35%, and Construction improved another +25%.  Further, sales improved in each region, for each segment as well.  This news caused analysts to once again increase earnings estimates for the next 2 quarters and 2 years. 

Even with increasing commodity costs, the overall improvement in retail sales and total volume netted out the costs and are now viewed as a net positive for the company.  Moreover, management recently commented that while they are working on some electrification of some aspects of its Resource Industry, they are more focused on improving fuel efficiency, customization, and built for purpose products.  Further, the company commented they will be increasing research and development (R&D) in the coming year. 

Lastly, the company has high balances of cash that management is expected to use for dividend increases, and a potential share repurchase program.  Currently, the company has a +1.87% annual dividend yield. 

As you can see in the detailed estimates table below, these impressive sales numbers has caused analysts to positively upgrade earnings estimate several times over the past 90 days.

We are also awaiting President Trump’s infrastructure plan which is supposed to be unveiled in the middle of this month.  This is expected to be a strong domestic catalyst for Caterpillar over the next half decade.  Further, recent reports showed economic growth in Europe and Asia, both areas where the company has a strong presence. 

The company reports Q4 earnings on January 25th, before the market opens.  There are very high expectations for CAT, but given the recent sales data, it should be a very solid report. 

Chevron (CVX - Free Report) has also beaten the Zacks consensus earnings and revenue estimates for the past three consecutive quarters.  But the big driver behind CVX’s sustained upturn has been the price of oil.  Oil recently broke $63 per barrel level for the first time in three and a half years.  Further, recent news items have indicated that the price per barrel will continue to rise through 2018. 

Early this week, the Energy Information Administration once again increased its price per barrel of oil expectations for 2018, after increasing its expectations December; West Texas Intermediate (WTI) up another +4.8%, and Brent crude was lifted another +4.3%.  The EIA also anticipates that the U.S. will now produce 10.27 million barrels per day in 2018, up from the 10.1 million expectation in December.  This is the highest estimate for annual production since the EIA started tracking production in 1983. 

Also, President Trump’s recent tax plan included opening the ANWR Alaska area for exploration and drilling.  This has a lot of potential for companies like Chevron, but the President didn’t stop at Alaska, he also expanded offshore drilling to almost all U.S. coastal waters. According to the report the Interior Department is proposing 47 auctions of drilling rights in the near future. 

As you can see in the detailed estimate table below, all of this positive news has caused analysts to positively revise Q4 17, Q1 18, FY 17 and FY 18 earnings estimates several times over the past 90 days.

Also, there is a belief on the street that oil prices might reach $80 per barrel by the end of 2018 due to two major factors.  First, the overall worldwide demand for oil continues to grow due to improving economic conditions across the globe.  Second, the continuation of OPEC’s production cut plan has constrained total supply while demand keeps increasing. 

Chevron currently pays a solid annual dividend yield of +3.36%.

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