Shares of Caterpillar Inc. CAT attained a new 52-week high of $163.20 on Oct 12, before ending the session a tad lower at $162.61. The stock has clocked a return of 10.1% so far this year, compared with the industry and the S&P 500’s rally of 6.4% and 8%, respectively.
The company has a market capitalization of $86 billion. It has an expected long-term earnings per share growth rate of 12%. The company has a trailing four-quarter earnings surprise of 13.1%, on average.
The company’s focus on cost reduction, strong liquidity position and expected gains from investments in digital initiatives, including e-commerce, have been fueling its share price performance. Further, the overall manufacturing sector seems to be coming out of the pandemic-induced crisis, which has been working in favor of Caterpillar.
Let's delve deeper.
On Jul 31, 2020, the company reported second-quarter 2020 results. Adjusted earnings per share of $1.03 plunged 64% on a year-over-year basis. This downside was expected as the company was impacted by weak demand for its products amid the COVID-19 pandemic. Nevertheless, drop in earnings was less severe than expected as earnings beat the Zacks Consensus Estimate of 66 cents by a significant margin of 56%.
At its conference call, Caterpillar stated that nearly all of its primary production facilities have resumed operations following suspension on account of supply chain issues, weak demand or as per government mandates. The company has taken actions to reduce costs including minimizing discretionary expenses, suspending 2020 base salary increases and short-term incentive compensation plans for many employees and all senior executives. Effective Jul 1, the company reinstated 2020 base salary increases for employees except for the most senior executives. These efforts will help sustain margins amid low volumes.
Caterpillar’s cash and liquidity position remains strong with the company ending second-quarter 2020 with cash and short-term investments of $8.8 billion and available liquidity sources of $18.5 billion. In July, Cat Financial issued $1.5 billion of new three-year and 18-month medium-term notes to further supplement its liquidity position. The company had $11.1 billion in long-term debt with no maturities in 2020 and less than $1.4 billion in 2021.
Caterpillar’s current ratio is at 1.50 and times interest earned ratio at 5.8. These figures indicate that the company is in a good position to meet its debt obligations. So far this year Caterpillar has returned $2.3 billion to shareholders through dividends and share buybacks. Although the company has suspended buyback plans owing to the pandemic, it remains committed to maintaining its dividend.
Prompted by these developments, the company has seen its share price go up 22% since its second-quarter earnings release.
Recently, Caterpillar entered into an agreement with Weir Group PLC to acquire its Oil & Gas business for a cash price of $405 million. This buyout will expand Caterpillar’s offerings to one of the broadest product lines in the well service industry. Moreover, the buyout supports Caterpillar’s commitment to invest for long-term growth through operational excellence and expanded offerings. The company also continues to focus on customers and the future by continuously investing in digital capabilities, connecting assets and jobsites, and developing the next generation of more productive and efficient products.
Also per the Institute for Supply Management, the U.S Manufacturing Purchasing Managers’ Index (PMI) was 55.4% in September. The index has been above 50 for four straight months, which denotes expansion. This is a major recovery from the PMI reading of 41.5% in April 2020, which can primarily be attributed to the COVID-19 crisis. The sector seems to be coming out of the woods on gradual resumption of the global economic activities and reopening of businesses. A pick up in manufacturing activity will reflect on Caterpillar’s results, and thus has fueled its price movement.
Estimate Revision Activity
The company’s earnings estimate for the current year is pegged at $5.23 per share and has moved north by 0.2% over the past 60 days. The estimate for 2021 has moved up 1.1% to $7.13 per share over the past 60 days.
Zacks Rank & Key Picks
Currently, Caterpillar carries a Zacks Rank #3 (Hold).
Some better-ranked stocks from the broader Industrial Products space are Worthington Industries, Inc. WOR, Silgan Holdings Inc. SLGN and Plug Power, Inc. PLUG. While Worthington sports a Zacks Rank #1 (Strong Buy), Silgan and Plug Power carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Worthington has a projected earnings growth rate of 19% for the current year. The company’s shares have gained 14% year to date.
Silgan has an estimated earnings growth rate of 32% for fiscal 2020. So far this year, its shares have appreciated 27%.
Plug Power has an expected earnings growth rate of 21% for fiscal 2020. Year to date, the company’s shares have soared 458%.
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