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Caterpillar Inc: Current Conditions Point to Further Growth
Stock Analysis & Ideas

Caterpillar Inc: Current Conditions Point to Further Growth

Caterpillar (CAT), a global heavy equipment trader, is a stock that may not be best suited to the needs of long-term investors due to its exposure to energy, metals and other commodities prices, which are inherently cyclical.

However, the chart below shows that if Caterpillar had been a consistent addition to an investor’s portfolio, it would have outperformed the S&P 500 index (the benchmark for the US market) almost every time recently.

I believe that Caterpillar is poised to continue to perform well in the future, and eventually lead the overall market. I’m bullish on this stock.

The company operates in an industry where demand for machinery and equipment for heavy industries such as mining or construction is constantly growing, regardless of whether the commodity cycle is more favorable or less favorable to customers.

There are times when commodity prices fall, which dampens the machine demand somewhat and then translates into underperforming earnings. However, what company is not familiar with fluctuations in demand and profits? Even a non-cyclical company cannot show absolute regularity in doing business.

If we compare Caterpillar’s earnings curve to that of The Coca-Cola Company (KO), a defensive consumer stock, there is little difference as both highs and lows appear simultaneously.

Solid Business and Robust Prospects

Economies around the world depend on the existence and availability of natural resources, particularly oil and gas for energy. Without the energy, all daily activities, even the most ordinary ones, such as eating, dressing or studying, could not be accomplished.

The extraction of raw materials happens regularly, as does the use of machines and systems that make this possible in the first place.

Future Demand for Caterpillar’s technologies

Due to higher underground activity and demand for commodities, the mining equipment market is expected to grow at 4.5% annually and surpass $36 billion by 2025, according to statistics from MarketsandMarkets.

The market for heavy construction machinery is expected to grow steadily worldwide over the next few years. It is projected to reach $273 billion in 2030, according to Statista.

The global farm equipment market is also set to grow strongly in the coming period as it is projected to grow at an annual rate of no less than 7% to approximately $253.3 billion by 2028, according to Fortune Business Insights.

Caterpillar’s Earnings Growth Estimates

Based on these projections, Caterpillar will be able to continue planning its future for growth.

Analysts expect Caterpillar’s earnings to grow 12.6% in 2022, by 18.6% in 2023, and 21.06% annually over the next five years. This should potentially give the stock price a powerful catalyst to reach higher levels.

Future Dividend Increases

As a result, the dividend per share should also increase, putting additional upward pressure on the stock’s value.

Over the past year, Caterpillar’s dividend has improved by 3.9%, while the market, represented by the S&P 500 Index, has posted a lower compound annual growth rate of 3.6%.

This was possible thanks to efficient operations, as the company managed to control costs through disciplined management of funds allocated to projects, prioritizing those with the highest return.

Unless the way Caterpillar manages its business changes, the company should continue to fund the dividend payment through incrementally higher free cash flow allocations.

Wall Street’s Take

Over the past three months, 13 Wall Street analysts have issued a 12-month price target for CAT. The company has a Moderate Buy consensus rating based on eight Buys, five Holds, and zero Sells.

The average Caterpillar price target is $246.23, implying 10.3% upside potential.

Stock Statistics

Shares are changing hands at around $223 as of the writing of this article for a market cap of $119.7 billion, a P/E ratio of 18.8, and a 52-week range of $179.67 to $246.69.

Conclusion

Caterpillar runs a solid business based on strong prospects as demand for its heavy industry machinery and systems is guaranteed by countries’ strategic mineral exploitation activity.

Fluctuations in the prices of fossil fuels, metals and other commodities will continue to occur and affect Caterpillar’s earnings.

Based on past performance and strong fundamentals though, this stock will also prove to be a good addition to the portfolio of long-term investors.

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