Time To Buy Caterpillar (CAT) Stock After U.S.-China Trade Ceasefire?
Zacks Investment Research | Dec 03, 2018 03:52AM ET
Caterpillar (NYSE:CAT) saw its stock price surge as high as 4% Monday after the U.S. and China agreed over the weekend not to raise tariffs at the start of the new year. CAT and other giants such as Boeing (NYSE:BA) , Walmart (NYSE:WMT) , Amazon (NASDAQ:AMZN) , and Apple (NASDAQ:AAPL) also jumped. Now, with a strong Q4 outlook and a new Bank of America Merrill Lynch (NYSE:BAC) upgrade, is it time to buy Caterpillar stock?
Tariffs & Upgrade
President Donald Trump and Chinese President Xi Jinping agreed Saturday in Argentina to hold off on additional tariffs on each other’s goods and products, which were tentatively scheduled to begin January 1. The ceasefire agreement will see the world’s two largest economies continue talks for 90 days in order to try to possibly put an end to the on-going trade war.
The announcement helped send stocks up big on Monday, with firms that were expected to be impacted by steeper tariffs able to breathe a sigh of relief, for now. Plus, Bank of America Merrill Lynch upgraded CAT stock on the back of the U.S. and China trade news.
The firm upgraded Caterpillar from “neutral” to “buy” on Monday. The banking power also lifted its 12-month price target from $140 per share to $163 per share. This represented a nearly 21% upside to CAT’s closing price on Friday of $135.67 a share.
Price Movement
Moving on, shares of CAT are down roughly 12% on the year based on trade war worries and rising costs. This fall places Caterpillar well below the S&P 500’s 3.3% climb in 2018, but ahead of its industry’s 15% decline—which includes the likes of Terex (NYSE:TEX) , Deere (NYSE:DE) , and others. Investors can, however, see that Caterpillar stock has surged over the last three years.
Valuation
Meanwhile, Caterpillar stock is currently trading at 10.7X forward 12-month Zacks Consensus EPS estimates, which marked a discount compared to its industry’s 14.7X average and falls well below the S&P’s 16.6X. CAT has traded as high as 24.7X over the last year, with a one-year median of 13.6X. More importantly, CAT is trading near its five-year low, which means we can say with some confidence that Caterpillar stock appears rather inexpensive at the moment.
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Outlook
The Illinois-based company has for much of the last year worked to offset the impact of tariffs through price increases and cost-cutting measures. Looking ahead, our current Zacks Consensus Estimate is calling for Caterpillar’s Q4 revenues to climb by 10.6% to hit $14.26 billion. At the same time, CAT’s full-year revenues are projected to surge 19.7% to reach $54.42 billion.
At the bottom end of the income statement, Caterpillar’s adjusted Q4 earnings are projected to soar by nearly 38% to hit $2.98 per share. Better still, the construction and mining equipment powerhouse’s adjusted full-year earnings are expected to skyrocket by 69.2%.
Bottom Line
Caterpillar is currently a Zacks Rank #3 (Hold) based on its recent mixed earnings estimate revision trends. CAT also sports an “A” grade for Value and a “B” for Growth in our Style Scores system.
Therefore, Caterpillar stock seems like it might be worth considering based on the recent trade news, along with its current relatively “cheap” valuation picture and growth prospects. And let’s not forget that CAT is a dividend payer, which always comes in handy.
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