Back to top

Here's Why You Should Buy Caterpillar (CAT) Stock Right Now

Read MoreHide Full Article
Caterpillar Inc. (CAT - Free Report) continues to benefit from improved end-user demand across all of its regions and most end markets, and incessant focus on cost control. Strong order rates and an increasing backlog bode well for its performance. Additional investments in expanded offerings and services along with digital initiatives like e-commerce are likely to aid this mining and construction equipment behemoth.
 
Over the past year, Caterpillar’s shares have gone up 23.4%, faring better than industry’s growth of 23.2%. If you haven’t taken advantage of the share price appreciation yet, the time is right for you to add the stock to portfolio as it looks promising and is poised to carry the momentum ahead. The stock has an estimated long-term earnings growth rate of 15.6%.
 
 
Upbeat 2018 Guidance
 
Robust sales momentum resulting from strong order rates and an increasing backlog bode well for an improved 2018 performance. Backed by these factors along with positive economic indicators globally and many of the company’s end markets, Caterpillar now anticipates earnings per share between $11.00 and $12.00 for fiscal 2018. The mid-point of the new range reflects year-over-year rise of 67%.
 
For fiscal 2018, the Zacks Consensus Estimate for earnings is pegged at $11.64, depicting year-over-year growth of 69%. The Zacks Consensus Estimate for revenues is pegged at $54.6 billion for fiscal 2018, projecting year-over-year growth of 20%.
 
Estimates Going Up
 
Estimates for Caterpillar have moved up in the past 90 days, reflecting the optimistic outlook of analysts. The earnings estimate for fiscal 2018 and fiscal 2019 both moved north by 8%.
 
Positive Earnings Surprise History
 
Caterpillar has outpaced the Zacks Consensus Estimate in the trailing four quarters. The company delivered a positive average earnings surprise of 31.79%.
 
Growth Drivers Intact
 
Improvement in Caterpillar’s end-markets will likely aid its results. Continued improvement in U.S residential and non-residential construction along with revival in infrastructure demand after many years of underinvestment will drive revenues. President Trump’s plans of big spending in infrastructure are likely to bolster Caterpillar’s revenues, since it is expected to play a major role in the national infrastructure plan. Notably, infrastructure development in China will also be a catalyst. EAME is anticipated to continue to grow amid high business confidence and stability in oil-producing countries.
 
Global economic momentum and increasing commodity prices is restoring miners’ profitability and these companies are resuming capital spending. This bodes well for the Resource Industries segment. Strong global demand for commodities is also anticipated to be a positive for heavy construction and quarry as well as aggregate customers. Sales into Oil and Gas applications are projected to increase in 2018, aided by reciprocating engines for gas compression and well servicing activity in North America. The current turbines backlog remains robust in support of the midstream pipeline business.
 
Sales for industrial applications will remain robust, primarily due to improving global economic conditions and higher end-user demand across most applications. Sales to the Transportation sector will benefit primarily from recent acquisitions in rail services. Rail traffic in North America has improved, with number of idled locomotives and railcars going down. Power Generation sales are improving after a multi-year downturn.
 
Further, the company’s disciplined efforts to reduce costs will help boost margins. Meanwhile, Caterpillar continues to focus on customers and the future by investing in digital capabilities, connecting assets and job sites along with developing the next generation of more productive and efficient products.
 
Stock Seems Undervalued
 
Caterpillar has a trailing 12-month price earnings (P/E) ratio of 15.8 while the industry’s average trailing 12-month P/E ratio is 16.3. Based on this ratio, the stock seems undervalued.
 
Attractive Rank and VGM Score Combination
 
Caterpillar has a Zacks Rank #2 (Buy) and a VGM Score of A. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores.
 
Such a score allows investors to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 offer the best upside potential.
 
 
Other Stocks to Consider
 
Investors interested in the industrial products sector may also consider other top-ranked stocks like Atkore International Group Inc. (ATKR - Free Report) , Donaldson Company, Inc. (DCI - Free Report) and Flowserve Corporation (FLS - Free Report) . All three stocks sport a Zacks Rank #1. 
 
Atkore has an expected long-term growth rate of 10%. Its shares have gained 30% over the past year.
 
Donaldson Company has an estimated long-term growth rate of 11.5%. Its shares have been up 25% in a year’s time.
 
Flowserve has a projected long-term growth rate of 17.5%. Its shares have rallied 26% over the past year.
 
Today's Stocks from Zacks' Hottest Strategies
 
It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%. 
 
And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
 


More from Zacks Analyst Blog

You May Like