Shares of Caterpillar (CAT - Free Report) jumped Wednesday to help extend its 15% month-long surge as investors see that its efforts to counter the Trump administration’s tariffs on steel and aluminum seem to be working. So, let’s see why Caterpillar stock looks like it might be worth buying, especially as its Q3 earnings come into view.
Recent News & Overview
Trump’s tariffs on imported steel and aluminum went into effect in June and don’t look like they will go away just yet despite the newly revised trade agreement between the U.S., Canada, and Mexico. These tariffs, along with the ongoing trade war between the world’s two largest economies, made many nervous that Caterpillar and other giants such as Boeing (BA - Free Report) would see their profits take a hit. But Caterpillar vowed that it would counteract the tariffs through a series of initiatives.
The construction and mining equipment giant estimated that the tariffs will lift its costs by up to $200 million between July and December. But the Illinois-based company announced that it would offset the impact through price increases, which began in July. Caterpillar has also focused on cost cutting.
A recent Reuters’ story highlighted some of CAT’s cost-cutting measures. The company is now able to produce more equipment at one of its North Carolina plants with 30% fewer people on the floor. Plus, Caterpillar told the publication that it has redesigned all new machines it makes to use 20% fewer parts, which lowers the firm’s steel consumption. “Fewer parts numbers are a huge win," CAT executive Tony Fassino told Reuters. “It improves safety, it improves the quality, it improves the cost.”
Price Movement & Valuation
Caterpillar was already moving toward more efficiency when the tariffs were rolled out. The company also raised its full-year profit outlook in Q2 based on its confidence that it could counter the tariffs.
Moving on, shares of CAT have surged recently as more investors start to see that its pullback represented a buying opportunity. Caterpillar has seen its stock price surge nearly 20% over the past three months, which outpaces its industry’s roughly 12% climb and the S&P 500’s 8% jump.
On top of the fact that CAT sits below its 52-week high, Caterpillar stock is currently trading at 12.3X forward 12-month Zacks Consensus EPS estimates. This represents a significant discount compared to its industry’s 16X average—which includes Deere (DE - Free Report) , Terex (TEX - Free Report) , and Manitowoc (MTW - Free Report) . CAT also falls below the S&P’s 17.4X.
More importantly, Caterpillar has traded as high as 24.7X over the last year, with a one-year median of 15.7X. CAT is also trading near both its one-year and three-year low of 10.7X. Jumping back even further we can see that Caterpillar stock appears rather “cheap.”
Looking ahead, our current Zacks Consensus Estimate is calling for Caterpillar’s Q3 revenues to surge by nearly 16% to hit $13.21 billion. The firm’s full-year revenues are projected to jump by over 20% to reach $54.59 billion.
Investors might be even more pleased by CAT’s earnings outlook. Caterpillar’s adjusted Q3 earnings are projected to soar by 44.6% to hit $2.82 per share, while its full-year earnings are expected to expand by 69.2%.
CAT has also experienced positive earnings estimate revision activity recently to help it land a Zacks Rank #2 (Buy). Plus, Caterpillar sports “A” grades for both Value and Growth in our Style Scores system and looks like it might be worth considering based on its stellar value and growth prospects.
Caterpillar is expected to report its quarterly financial results on October 23.
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