Caterpillar (CAT) is the world’s leading manufacturer of construction and mining equipment. I’m bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
Baird Thinks Supply-Chain Disruptions Won’t Be an Obstacle
The manufacturing giant’s prospects have been given a boost after the U.S. House of Representatives passed a $1 trillion infrastructure bill last week. However, many are worried about whether the company will be able to attend to the rising demand amid supply concerns.
According to Baird analyst, Mircea Dobre, the manufacturing market is more than able to “absorb the demand”, and investors have nothing to be anxious about.
Dobre may be correct, Caterpillar has 19.3% year-over-year value gains in inventories, and while supply-chain bottlenecks may still persist, we’re clearly seeing re-opening progress around the globe.
Latest Earnings Release
Caterpillar released its Q3 earnings last month. The company reported a 25% year-over-year increase in revenue, and net income per share of $2.60 versus $1.22 a year ago.
To break things down by segment, Caterpillar’s Construction Industries sales jumped by 30% (year-over-year), Energy and Transportation by 22%, and Resource Industries by 32%.
Apart from infrastructure bill-induced construction spending, I anticipate strong demand for the energy and resource segments due to recent commodity price surges.
Solid Dividend Option
Caterpillar stock remains a solid dividend play during a dividend-hungry market.
A forward dividend yield of 2.15% and a 5-year growth rate of 6.80% provide a solid baseline for judgment. However, it’s when one digs deeper that it becomes noticeable how much capacity remains for dividend growth.
Operating cash flow growth of 17.48% (year-over-year) and a 5-year net income CAGR of 38.51%, mean that the company is fundamentally set to provide sustainable dividends. Furthermore, the stock’s dividend yield to payout and cash per share ratios are looking promising at 4.78% and 15.81, respectively.
Underpriced and Undervalued
Caterpillar stock has a 0.18% 60 month CAPM alpha, which means that it generally trades above its fair price. As a matter of fact, according to this metric, Caterpillar usually trades at a 30.4% pricing premium relative to its sector peers.
Combining the data above with a P/E ratio (22.1) trading at a 13.5% sector discount and a PEG (0.4) below the generally accepted overvalued threshold (1.00), indicates to me that the stock’s undervalued.
Wall Street’s Take
Using the 11 ratings recently provided by Wall Street, the average Caterpillar price target of $231.36 implies 10.2% upside potential. According to the TipRanks Wall Street rating tracker, the stock has a Moderate Buy consensus rating, based on seven Buys, three Holds, and one Sell assigned in the past three months.
Concluding Thoughts
There’s no doubt that Caterpillar will receive strong demand considering the infrastructure bill and rising commodity prices. The stock remains undervalued and has a solid dividend prospect.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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