Caterpillar Inc. (CAT) Outlook Is Good Despite Tariff Threat
Caterpillar Inc. (NYSE: CAT) stock is off to a rough start to 2018, but analysts say that could all change starting with the company's first-quarter earnings report expected out on April 24.
Investors have sold shares of Caterpillar in recent weeks on fears that steel tariffs and a potential trade war with China could eat into Caterpillar's profits, but analysts say Caterpillar's business is strong enough to thrive even in the midst of rising steel prices.
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According to Buckingham Research Group analyst Neil Frohnapple, Caterpillar's recent market sell-off has created a compelling risk-reward balance for investors ahead of what he says will be a strong first-quarter report.
While rising steel prices may elevate Caterpillar's costs this year, Frohnapple says the company is still well-positioned to capitalize on a booming global economy and boost earnings per share by 30 percent in 2018. Frohnapple says Caterpillar's current growth cycle is only beginning after years of aggressive cost-cutting that has trimmed roughly $2 billion from the company's expenses since 2014. Frohnapple projects Caterpillar will report full-year 2018 EPS of $9.15, beating Street estimates by 10 cents.
"We believe upward revenue momentum in a number of Caterpillar's major end markets will push earnings to the high end of the 2018 EPS guidance range and more than offset any potential incremental steel cost inflation this year," Frohnapple says.
However, he says there is still plenty up earnings upside in the longer term.
"Additionally, we believe that our 2019 EPS estimate of $10.50 is a reasonable mid-cycle earnings estimate for this cycle and we calculate a peak earnings estimate of $16/share," he says.
Morningstar analyst Nick Mokha says the steel tariffs may actually have set the table for a better-than-expected first quarter for heavy equipment stocks like Caterpillar.
Mokha says he was already expecting earnings season to be strong given that tax reform incentivized customers and manufacturers to delay fourth-quarter orders until the first quarter to take advantage of both the immediate depreciation allowance and lower tax rates.
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"But with the latest news on tariffs, we believe heavy-equipment companies will witness even stronger demand in the first quarter as customers who were contemplating orders become even more likely to pull the trigger," Mokha says.
Buckingham Research Group has a "buy" rating and $170 price target for Caterpillar. Morningstar has a "fairly valued" rating and $125 fair value estimate for CAT stock.
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