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Buy CAT Stock Because It's Cheap & Caterpillar Is Set to Grow

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Caterpillar (CAT - Free Report) saw its stock price pop Wednesday on the back of a positive Deutsche Bank (DB - Free Report) analyst note. Shares of CAT and other giants, such as Boeing Co. (BA - Free Report) have sunk over the last few months as trade war concerns mount. But Caterpillar’s growth projections look strong, and CAT stock might be too cheap to pass up.


Deutsche Bank analyst Chad Dillard resumed coverage of Caterpillar with a “buy” rating, citing the need for mining and oil companies to renew and replace old equipment. Dillard told clients that CAT is likely to see its revenues and share price climb on increased demand. “Caterpillar is earlier in its cycle than the market gives credit and our preferred way to play the early stage equipment replacement cycle," Dillard wrote in a note Tuesday.

“Mining and oil & gas producers have systematically underinvested in equipment and are in the early stages of replacing the equipment bought during the height of the commodity super cycle.”

The Deutsche analyst went on to say that he estimates that mining sales could jump by 30%, while oil and gas sales might grow by 10% each of the next couple of years. Plus, he said that the Deerfield, Illinois-based company is currently trading at its largest discount compared to the S&P 500 in almost 20 years


CAT stock is currently trading at 11.1X forward 12-month Zacks Consensus EPS estimates, which represents a significant 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 17.5X.

Better still, Caterpillar has traded as high as 24.7X over the last year, with a one-year median of 16.5X. CAT is also trading near both its one-year and three-year low of 10.7X. Add all of this up and CAT stock looks pretty cheap.


Growth Outlook

Caterpillar raised its full-year profit outlook in the second quarter and noted that it plans to offset tariff and freight costs through mid-year price increases and spending discipline. The firm’s board also authorized a new share repurchase plan of up to $10 billion of common stock, effective at the start of 2019, with no expiration date.

Looking ahead, Caterpillar’s third-quarter revenues are projected to surge by 15% to hit $13.13 billion, based on our current Zacks Consensus Estimate. Meanwhile, CAT’s full-year revenues are projected to jump by 19.6% to touch $54.38 billion. 

At the bottom end of the income statement, Caterpillar’s adjusted Q3 earnings are projected to soar by 41.5% to reach $2.76 per share, while full-year earnings are expected to expand by nearly 68%. Investors should also be pleased to note that CAT has seen seven upward earnings estimate revisions for Q3 over the last 60 days, with 100% agreement to the upside. During this same time period, the company has also received 10 positive revisions for fiscal 2018 and 2019, against zero downward changes.

Bottom Line

Caterpillar is currently a Zacks Rank #2 (Buy) based, in large part, on its positive upward earnings estimate revision trends. The company sports “A” grades for both Value and Momentum and a “B” for Growth in our Style Scores system. Shares of CAT are also down roughly 10% over the last three months, which means now might be time to buy Caterpillar stock while it still rests well below its 52-week high.

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