Why Caterpillar (CAT) Stock Looks Like A Buy Ahead Of Q4 Earnings
Zacks Investment Research | Jan 24, 2019 01:12AM ET
Shares of Caterpillar (NYSE:CAT) have climbed over 13% since Christmas as part of the larger market comeback driven by giants like Boeing (NYSE:BA) and Amazon (NASDAQ:AMZN) . So, it’s time to dive into why CAT stock looks like a buy, with the construction and mining power set to report its Q4 financial results before the opening bell Monday.
Overview
Caterpillar stock has suffered over the last year as investors grow nervous about rising costs, driven by metal tariffs, shipping expenses, and more. The company is coming off a top and bottom-line beat in the third quarter, but the firm provided lower-than-excepted guidance.
The industrial equipment manufacturer must also deal with its exposure to China, which could become more of a problem as the world’s second-largest economy slows down amid the continuing trade war. Investors should pay close attention to any updates from Caterpillar on this front, especially after Apple’s (NASDAQ:AAPL) shocking guidance and Alibaba’s (NYSE:BABA) projected slowdown (also read: What to Expect from Alibaba Earnings Amid Chinese Economic Slowdown ).
Caterpillar has committed to lifting its prices to make up for its growing costs. And despite growing global economic concerns, many analysts are still high on CAT stock.
JPMorgan (NYSE:JPM) has advised its investors to be long Caterpillar as we move into earnings. The firm has an “overweight” rating on Caterpillar and a $188 price target, which marks a 42% upside from its current price point. “From a longer-term perspective, our top pick remains Caterpillar as we believe that its resource business is still in the early stages of recovery and should support out-year earnings growth as well as opportunities for shareholder friendly capital allocation,” JPM analysts wrote in a note earlier this month.
As we touched on earlier, CAT stock has suffered over the last year. In fact, despite its recent climb, shares of Caterpillar rest roughly 24% below their 52-week high, which could set up a solid buying opportunity for those high on Caterpillar. We can see, however, that CAT stock has crushed its peer group’s average over the last five years. This group includes Terex (NYSE:TEX) , Manitowoc (NYSE:MTW) , H&E Equipment Services (NASDAQ:HEES) , and others.
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Q4 Outlook
Looking ahead, the Illinois-based company’s Q4 revenues are projected to pop 10.8% to reach $14.26 billion, based on our current Zacks Consensus Estimate. We should note that this would mark a downturn from Q3’s 18% top-line expansion. With that said, this growth is projected to come on top of the year-ago period’s 35% revenue surge.
At the bottom end of the income statement, Caterpillar’s adjusted Q4 earnings are projected to soar 38.4% to touch $2.99 per share. Meanwhile, CAT’s full-year earnings are expected to skyrocket by 69.3%. Investors should also note that Caterpillar has earned some positive earnings estimate revisions over the last 30 days.
Bottom Line
Caterpillar is currently a Zacks Rank #2 (Buy) based, in part, on its recent earnings estimate revision trends. CAT is also trading at 10.3X forward 12-month Zacks Consensus EPS estimates at the moment. This marks a discount compared to its industry’s 13.9X average and falls well below its own 52-week high of 21.1X and its five-year median of 17.3X. Therefore, we can say that CAT’s valuation appears somewhat attractive at the moment, especially given its growth outlook.
The firm is also a dividend payer that has paid a quarterly cash dividend of $0.86 a share during fiscal 2018, up from $0.78 the previous year. Caterpillar is set to announce its Q4 2018 financial results before the market opens on Monday, January 28.
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