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Caterpillar (CAT) Stock Looks Like A Strong Buy Ahead of Q3 Earnings

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Caterpillar (CAT - Free Report) is scheduled to report its third quarter financial results on Tuesday, October 23. Shares of the construction and mining equipment giant have fallen this year, but Caterpillar’s outlook appears strong despite trade war concerns. So, let’s see why CAT stock looks like a strong buy ahead of its Q3 earnings release.

Recent News & Overview

At this point the news about Trump’s tariffs are old, but their impacts are being felt by many companies and industries. The steel and aluminum tariffs, along with the ongoing trade war between the U.S. and China have investors nervous about Caterpillar’s short and long-term profitability. Yet, CAT and its management seem confident that their plans to counter the tariffs will help Caterpillar expand both its top and bottom lines amid rising costs and uncertainty.  

Caterpillar, which estimated that the tariffs will up its costs by up to $200 million between July and December, plans to offset the impact through price increases and cost cutting. Even before the tariffs were rolled out, the Illinois-based company started to become more efficient. For example, the firm produces more equipment at some plants with 30% fewer employees.

Furthermore, Caterpillar said that it has designed new machines with 20% fewer parts, which lowers the firm’s steel consumption, among other benefits. “It improves safety, it improves the quality, it improves the cost,” CAT executive Tony Fassino told Reuters recently. Plus, Caterpillar raised its full-year profit outlook in Q2.

 

 

We can see from CAT’s price movement chart that it has outpaced its industry over the last five years. Shares of Caterpillar are also still up roughly 63% over the last 24 months and 9% during the past year despite its recent downturn. Investors should also note that CAT stock closed Monday at $141.80 per share. This means Caterpillar stock seems to be in a potentially solid buying position sitting approximately 18% below its 52-week high of $173.24.

Valuation

Maybe more important than Caterpillar’s current price, is the fact that CAT is trading at 11.2X forward 12-month Zacks Consensus EPS estimates. This represents a discount compared to its industry’s 14.6X average—which includes Deere (DE - Free Report) , Terex (TEX - Free Report) , and Manitowoc (MTW - Free Report) —and the S&P’s 16.4X.

Plus, Caterpillar has traded as high as 24.7X over the last year, with a one-year median of 15.4X. We can also see that CAT stock is trading near its three-year lows at the moment, which means it’s not too much of a stretch to say that Caterpillar stock appears relatively cheap at the moment—especially considering its growth prospects.

 

Outlook

Looking ahead, Caterpillar’s Q3 revenues are projected to surge by roughly 15.8% to reach $13.21 billion, based on our current Zacks Consensus Estimate. Meanwhile, the company’s full-year revenues are expected to surge over 20%.

At the other end of the income statement CAT’s outlook is even more impressive. Caterpillar’s adjusted third-quarter earnings are projected to soar by 45.1% to hit $2.83 per share. And the construction and mining equipment powerhouse’s adjusted full-year EPS figure is expected to expand by 69.3%.

 

Bottom Line

We can also see that Caterpillar’s earnings estimates for Q3 and fiscal 2018 and 2019 have all climbed in the last seven days. This positive earnings revision movement helps Caterpillar earn a Zacks Rank #1 (Strong Buy). Caterpillar also rocks an “A” VGM score and has topped our quarterly earnings estimates for nine straight periods.

Caterpillar is expected to report its quarterly financial results on Tuesday, October 23.

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