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Buy Caterpillar Stock Ahead of Q4 FY20 Earnings?

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Benjamin Rains
·3 min read
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Caterpillar CAT is set to release its fourth quarter financial results before the opening bell on Friday, Jan. 29, as part of a busy week on Wall Street that will see everyone from McDonald's MCD to Tesla TSLA and Apple AAPL all report. CAT stock has outclimbed the market over the last six months even though its sales and earnings have taken a hit as the global economy struggles to bounce back.

Comeback Trail?

The S&P 500 has climbed nearly 4% since the start of 2020 and 18% since the end of October. The run comes on the back of vaccine positivity and the hope for further economic stimulus under the Biden administration. CAT shares are up 35% in the last six months to crush the S&P 500’s 20%, even though its revenue is down 19% in the trailing 12 months.

Wall Street has clearly bet that the construction and mining equipment powerhouse will be able to bounce back when the economy starts to hum again. On top of that, there is hope on Wall Street that Washington will pass some type of infrastructure spending, which would likely help spur Caterpillar and others like Terex TEX and United Rental URI.

CAT executives said last quarter that they were “cautiously optimistic” about the near-term economic outlook and its CEO Jim Umpleby was “encouraged by positive signs in certain industries and geographies.” The company also boasts a strong balance sheet and its Manufacturing - Construction and Mining industry sits in the top 7% of our over 250 Zacks industries right now.

Looking ahead, Zacks estimates call for CAT’s Q4 sales to fall 15% to $11.2 billion, with its adjusted EPS projected to sink 45% to +$1.45 a share. This would mark an improvement from recent periods, and the company is projected to return to growth in the first quarter of fiscal 2021—against an easy-to-compare quarter.

CAT has topped our EPS estimates in three out of the last four quarters, including a 17% beat in Q3 and a 56% beat in Q2. Caterpillar lands a Zacks Rank #3 (Hold) right now, alongside a “B” grade for Value and an “A” for Momentum in our Style Scores system.

The stock has slipped over the last week to rest about 6% off its recent highs, which seems healthy given its run. Caterpillar could face more near-term selling pressure and investors might want to wait for more updates from management as they should know far more about what’s to come.

That said, six out of the 17 brokerage recommendations that Zacks has for CAT come in at a “Strong Buy,” with 10 more at a “Hold.” And its 2.2% dividend yield tops the S&P’s 1.5% average and the 30-year Treasury’s 1.9%. Therefore, longer-term investors might want to consider keeping an eye on the industrial sector titan.

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