BANR or HFWA: Which Is the Better Value Stock Right Now?
Caterpillar Inc. CAT has delivered better-than-expected first-quarter 2018 performance, driven by continued strength in many of its end markets as well as incessant focus on cost control. Further, the mining and construction equipment behemoth also hiked 2018 guidance buoyed by these factors and continued global economic growth.
Share price of this Zacks Rank #1 (Strong Buy) stock has been surging, of late. If you haven’t taken advantage of the share price appreciation yet, the time is right for you to add the stock to portfolio as it looks promising and is poised to carry he momentum ahead. The stock has an estimated long-term earnings growth rate of 13.3%.
Stellar Performance in Q1
Caterpillar’s first-quarter adjusted earnings per share soared 120% year over year to $2.82 while revenues surged 32% to $12.9 billion. Both beat the respective Zacks Consensus Estimates. Also, Caterpillar’s backlog was at $17.5 billion at the end of quarter, up from $15.8 billion at 2017 end. The increase was mainly driven by higher backlog at Construction Industries and Energy & Transportation while backlog at Resource Industries remained flat from 2017-end.
Strong sales momentum resulting from strong order rates, lean dealer inventories and an increasing backlog bode well for an improved 2018 performance. Given these factors, along with positive economic indicators globally and many of the company’s end markets, Caterpillar now expects adjusted earnings per share between $10.25 and $11.25 for fiscal 2018. It had earlier provided adjusted earnings per share guidance of $8.25-$9.25 for the fiscal. The mid-point of $10.80 reflects year-over-year rise of 56%. The company’s outlook assumes a tax rate of 24%, including the current estimate of the impact of U.S. tax reform legislation.
Ahead of the Industry
The company climbed 51.8% over the past year, higher than the S&P 500’s growth of 11.3% as well the broader industry’s increase of 49.9%.
We note that the industry is also favorably placed as it occupies a space in the top 13% of the Zacks classified industries (34 out of the 256).
Estimates for Caterpillar have moved up in the past 30 days, reflecting the optimistic outlook of analysts. The earnings estimate for fiscal 2018 has advanced 13% while that of fiscal 2019 has moved up 11%.
The Zacks Consensus Estimate for revenues is at $52.3 billion for fiscal 2018, displaying 15% year-over-year growth. The revenue estimate for fiscal 2019 is at $56.6 billion, projecting an 8.2% annual growth.
For fiscal 2018, the Zacks Consensus Estimate for earnings is pegged at $10.39, depicting year-over-year growth of 51% while the estimate for fiscal 2019 of $11.73 displays year-over-year growth of 13%.
Positive Earnings Surprise History
Caterpillar has outpaced the Zacks Consensus Estimate in the trailing four quarters, delivering a positive average earnings surprise of 33.4%.
Caterpillar expects broad-based growth in Construction Industries in 2018. In North America, continued improvement in residential and non-residential construction as well as revival in infrastructure demand after many years of underinvestment will drive revenues. President Trump’s plans of big spending in infrastructure would boost Caterpillar’s revenues, since it is expected to play a major role in the national infrastructure plan. Infrastructure development in China will also be a catalyst. EAME is anticipated to continue to grow amid high business confidence and stability in oil-producing countries. Further, Latin America will continue on its growth path.
Global economic momentum and increasing commodity prices is restoring miners’ profitability and they are resuming capital spending. This bodes well for the Resource Industries segment. The company projects capital spend to increase for both equipment replacement cycles and expansions. Moreover, higher machine utilization levels should boost aftermarket parts growth.
Sales into Oil and Gas applications are projected to increase in 2018, aided by reciprocating engines for gas compression and well servicing activity in North America. The current turbines backlog remains robust in support of the midstream pipeline business. The company anticipates an increase in Transportation primarily from recent acquisitions in rail services. Rail traffic in North America has improved, with number of idled locomotives and railcars going down. Power Generation sales are forecast to improve after a multi-year downturn. Sales into Industrial applications are anticipated to rise in 2018 driven by projected demand in EAME.
Further, ongoing efforts to reduce costs will help boost margins. Meanwhile, Caterpillar continues to focus on customers and on the future by continuing to invest in digital capabilities, connecting assets and job sites along with developing the next generation of more productive and efficient products.
Stock Seems Undervalued
Caterpillar has a trailing 12-month price earnings (P/E) ratio of 18.4 while the industry’s average trailing 12-month P/E ratio is 20.0. Based on this ratio, the stock seems undervalued.
Other Stocks to Consider
Some other top-ranked stocks in the sector include Terex Corporation TEX, Lakeland Industries, Inc. LAKE and H&E Equipment Services, Inc. HEES. While Terex flaunts a Zacks Rank #1, Lakeland and H&E Equipment Services carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Terex has expected long-term growth rate of 20.2%. Its shares have gone up 24% in a year’s time.
Lakeland Industries has expected long-term growth rate of 10.0%. Its shares have appreciated 24% over the past year.
H&E Equipment Services has expected long-term growth rate of 17.4%. Its shares have surged 80% over the past year.
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