Shares of the mining and construction equipment behemoth, Caterpillar Inc. CAT has been performing well 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 the momentum ahead. The stock has an estimated long-term earnings growth rate of 9.50%.
Favorable Zacks Rank & Score
Caterpillar carries a Zacks Rank #1 (Strong Buy) and a VGM score of “B”. Here V stands for Value, G for Growth and M for Momentum. Caterpillar’s score is a weighted combination of these three scores (Value - B, Growth - A, Momentum - B). Such a score allows you to eliminate the negative aspects of stocks and select winners.
A Turnaround Performance in Q1
Caterpillar reported year-over-year improvement in both the top line and bottom line in first-quarter 2017 for the first time in 10 quarters. First-quarter 2017 adjusted earnings came in at $1.28 per share that handily beat the Zacks Consensus Estimate of 62 cents and also doubled from prior-year quarter’s earnings of 64 cents. Revenues improved 3.8% year over year to $9.8 billion in the quarter, surpassing the Zacks Consensus Estimate of $9.36 billion. The better-than-expected results came on the back of the company’s incessant efforts to cut down costs to counter the impact of low-end user demand across many of its businesses. Also, backlog improved on a year-over-year basis for the first time since third-quarter 2014.
Ahead of the Industry
The company has outperformed the Zacks categorized Machinery-Construction/Mining subindustry in the past one year. Shares have gained 41.8% while the industry registered an increase of 40.3%.
We note that the industry is also favorably placed as it occupies a space in the top 10% of the Zacks classified industries (25 out of the 256).
Given the upbeat first-quarter performance, Caterpillar has hiked revenue guidance to the range of $38–$41 billion from the prior range of $36–$39 billion. The company now projects earnings per share of $3.75 per share compared with previous guidance of $2.90 per share.
Estimates for Caterpillar have moved up in the past 30 days, reflecting the optimistic outlook of analysts. The earnings estimate for fiscal 2017 has surged 30% while that of fiscal 2018 has moved up 16%.
The Zacks Consensus Estimate for revenues is at $39.81 billion for fiscal 2017, displaying 3.30% year-over-year growth, within management guidance. The revenue estimate for fiscal 2018 is at $42.32 billion, projecting a 6.30% annual growth.
For fiscal 2017, the Zacks Consensus Estimate for earnings is pegged at $4.05, depicting a year-over-year growth of 18.39% while the estimate for fiscal 2018 of $4.95 displays year-over-year growth of 22.15%.
Positive Earnings Surprise History
Caterpillar has outpaced the Zacks Consensus Estimate in the trailing four quarters, delivering a positive average earnings surprise of 40.25%.
Caterpillar’s share price has benefited since the presidential victory of Donald Trump as investors anticipate his plans of big spending in infrastructure to boost Caterpillar’s revenues which had so far borne the brunt of weak mining demand. The prospect of gigantic infrastructure spending is welcome news for the company which is expected to play a major role in the national infrastructure plan.
The company will also benefit from its incessant focus on cost reduction and improvement in the Asia Pacific region. In construction, Asia Pacific is showing promise while leading indicators of U.S. non-residential construction signal robust conditions ahead.
Stock Seems Undervalued
Caterpillar has a trailing 12-month price earnings (P/E) ratio of 24.52 while the Zacks categorized sub industry’s average trailing 12-month P/E ratio is 26.16. Based on this ratio, the stock seems undervalued.
Other Stocks to Consider
Some other top ranked stocks worth considering in the sector include AGCO Corporation, AGCO, Graco Inc. GGG and Parker-Hannifin Corporation PH. All of these stocks sport a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
AGCO Corporation has delivered an average earnings surprise of 40.39% in the trailing four quarters. Graco and Parker-Hannifin delivered an average positive earnings surprise of 13.88% and 14.94%, respectively in the past four quarters.
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Caterpillar, Inc. (CAT): Free Stock Analysis Report
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