Heavy equipment manufacturer Caterpillar (CAT), had been on the ropes for a while as interest in construction equipment was declining. That has started to rebound, though, and Caterpillar is reaping the benefits.
The company’s earnings report proved something of a mixed bag, but it was enough to drive it higher. A recovering market for construction hardware, along with Caterpillar’s name recognition, are enough to keep me bullish on the company. (See Analysts’ Top Stocks on TipRanks)
Looking at Caterpillar’s stock chart year-to-date is less about ups and downs than it is about one up and one down. The “up” is the first half of the year, starting from late January and going until early June. In that time, the company went from trading around $177 to just over $240.
After that point, though, a slow downward trend kicked in. The company spent most of the second half of this year heading for the $200 mark, which is about where it is today. (See Caterpillar stock charts on TipRanks)
That’s when Caterpillar brought out its earnings report. Portfolio managers like John Petrides, at Tocqueville Asset Management, were labeling this earnings call a “must-listen” event. Caterpillar didn’t disappoint.
Despite this wholly unique set of market circumstances, Caterpillar posted a solid report. The company revealed earnings of $2.66 per share, easily beating the consensus of $2.20 per share. Revenue, however, was a near miss. The company brought in just $12.4 billion instead of the $12.5 billion consensus estimates were calling for.
Caterpillar also noted that adjusted profits were nearly double what they were this time last year. Improvements in demand for heavy construction equipment coupled with rising commodity prices gave Caterpillar a real edge this quarter. Dealers were seeing increased activity and were ordering more units to accommodate that growth as well.
A Piece of the Building World
Perhaps the greatest appeal to owning Caterpillar is that you own a piece of the building world. There will always be a certain demand for what Caterpillar offers because it’s involved in so much of the building world.
Caterpillar’s line of products runs the gamut, from excavators to bulldozers to skid loaders. This means that Caterpillar has a stake in anything involving moving dirt from one place to another. This, in turn, means a connection to not just the construction industry, but also to agriculture and several others.
Moreover, Caterpillar has a solid line of merchandise—seen anyone wearing a CAT hat lately?—as well as some less-expected fare such as large-scale generators. This allows it to branch out into other markets and diversify its income streams.
While the heavy equipment maker might well have seen some problems from the fallout of real estate firms in China, that doesn’t seem to be a major problem at the moment.
In addition, infrastructure spending continues to be an important issue in Washington. Throw in Caterpillar’s connection to commodities from metals to farm crops, and you’ve got a recipe for a winner.
Wall Street’s Take
Turning to Wall Street, Caterpillar has a Moderate Buy consensus rating, based on eight Buys, four Holds, and one sells assigned in the past three months. The average Caterpillar price target of $237.62 implies 17.3% upside potential.
Analyst price targets range from a low of $165.00 per share to a high of $270.00 per share.
Concluding Views
Caterpillar stock is a bit pricey right now. However, it’s off this year’s highs, which is a good sign for anyone looking to buy in. Moreover, Caterpillar also boasts a history of growing dividends. There’s value to be had as an income stock, and there’s also some potential growth here.
Buying Caterpillar will not only provide access to construction but also to commodity growth and harvest. Caterpillar has a lot of fingers in a lot of pies which is a solid reason for why I’m bullish.
Disclosure: At the time of publication, Steve Anderson did not have a position in any of the securities mentioned in this article.
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