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Caterpillar (CAT) Stock Is a Strong Buy Despite Tariff Concerns

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Shares of Caterpillar (CAT - Free Report) have slipped since the company reported exceptional second-quarter financial results Monday as investors worry trade war tensions and tariffs will harm CAT going forward. But Caterpillar raised its 2018 guidance and both the company and its stock look strong.

Q2 Overview

Caterpillar posted quarterly revenues of $14 billion, which marked a 24% climb from the year-ago period and topped the $13.7 billion Zacks Consensus Estimate. CAT’s adjusted quarterly earnings soared 99% to hit $2.97 share, also coming in well above our estimate.

The company raised its adjusted fiscal 2018 earnings guidance from between $10.25 to $11.25 per share up to the $11.00 to $12.00 per share range. “Based on outstanding results in the first half of the year and continued strength in many of our end markets, Caterpillar is again raising our profit outlook for 2018,” Caterpillar CEO Jim Umpleby said in a statement.

Investors should also note that CAT’s second-quarter Machinery, Energy & Transportation operating cash flow was $2.1 billion. Meanwhile, the construction and mining giant repurchased $750 million shares of common stock and announced in June that it upped its quarterly dividend of 10% to $0.86 per share.

All of this should have inspired confidence from investors, but it seems that the Trump administration’s tariffs and trade war fears between the world’s two largest economies scared away investors. Plus, CAT did, in fact, say that the “recently imposed tariffs are expected to impact material costs in the second half of the year by approximately $100 million to $200 million, and the company expects supply chain challenges to continue to pressure freight costs.” Still, Caterpillar raised its full-year outlook because the firm plans to offset these impacts through mid-year price increases and spending discipline.

Furthermore, CAT is set to return value to investors through a new round of buybacks. Caterpillar’s board authorized a new share repurchase plan of up to $10 billion of common stock, effective at the start of 2019—with no expiration date. Meanwhile, the firm’s current plan, which expires this year, has $4.2 billion left in repurchases to be made.

Price Movement

Now that we have covered Caterpillar’s strong second quarter and hopefully lessened any major worries due to the increased negative trade and tariff rhetoric, let’s take a look at CAT’s price movement. The company finished 2017 as the second-best performing Dow stock, up 70%. However, shares of CAT are up just roughly 22% over the last year. And CAT has seen its stock price fall 12% since the start of 2018.

 

Valuation

CAT stock is currently trading at 12.1X forward 12-month Zacks Consensus EPS estimates, which marks a discount compared to its industry’s 15.5X average—which includes Deere (DE - Free Report) , Terex (TEX - Free Report) , and Manitowoc (MTW - Free Report) —as well as the S&P’s 17.2X.

Over the last year, Caterpillar has traded as high as 24.7X, with a one-year median of 18.7X. CAT stock has also traded as high as 32.6X during the last two years, which it hit in January 2017. Caterpillar is currently trading just slightly above its three-year low of 11.8X. Therefore, Caterpillar stock is pretty attractive at its current valuation.  Coupled with the fact that its actual stock price is technically less expensive than it has been recently, resting below its 52-week high, CAT stock might just be a steal at the moment.

 

Growth Outlook

Our current Zacks Consensus Estimate is calling for Caterpillar’s third-quarter revenues to hit $13.13 billion, which would mark a 15% climb from the year-ago period. For the full year, the company’s revenues are projected to surge by over 19.5% to touch $54.33 billion. 

Caterpillar’s adjusted Q3 earnings are projected to skyrocket by 41% to reach $2.75 per share. The company’s full-year earnings are expected to reach $11.39 per share, representing over a 65% expansion.

CAT has earned six earnings estimate revisions for Q3, with nearly 100% agreement to the upside, all within the last seven days. The company has also received eight full-year and nine fiscal 2019 upward earnings revisions during this same timeframe, against zero downward changes.

Caterpillar is currently a Zacks Rank #1 (Strong Buy) and sports an “A” grade for Momentum and a “B” for Value in our Style Scores system. 

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