Caterpillar Inc. CAT is gaining from forecast-topping second-quarter 2021 results and solid backlog levels. The company is poised well to benefit from improving demand in most of its end markets and cost-control efforts. A robust liquidity position, investments in expanded offerings, and services and digital initiatives are also expected to fuel growth.
Shares of Caterpillar have gained 20.1% so far this year compared with the industry’s rally of 20.9%.
The company currently has a Zacks Rank #3 (Hold) and a VGM Score of B. Our research shows that stocks with a VGM Score of A or B combined with a Zacks Rank #1 (Strong Buy) 2 (Buy) or 3 offer the best investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.
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Let’s take a look into the factors that make this stock worth holding on to.
Upbeat Q2 Results & Improved Backlog: Caterpillar witnessed a whopping 105% year-over-year improvement in second-quarter 2021 adjusted earnings per share to $2.60. Revenues increased 29% year over year to $12.9 billion. Caterpillar’s backlog at the end of the reported quarter was $18.4 billion, which was up $1.5 billion on a sequential basis and $5.5 billion on a year-over-year basis. This bodes well for the company’s top-line performance in the forthcoming quarters.
Estimates Move Up: Over the past month, the Zacks Consensus Estimate for Caterpillar for fiscal 2021 has increased 3.8%. The consensus mark for fiscal 2022 has also been revised upward by 2.7% over the same time frame.
Positive Earnings Surprise History: Caterpillar outpaced the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average surprise being 29.9%.
Healthy Growth Prospects: The Zacks Consensus Estimate for earnings for fiscal 2021 for Caterpillar is currently pegged at $10.08, suggesting year-over-year growth of 53.7%. For fiscal 2022, the consensus estimate for earnings is pegged at $12.20, indicating a year-over-year improvement of 21%.
Growth Drivers in Place
In North America, the demand from both residential and non-residential construction will bolster sales for Caterpillar’s construction equipment. With the U.S Senate passing the $1-trillion infrastructure bill, the perked-up investment in roads, bridges, airports and waterways represents a huge opportunity for Caterpillar. The outlook for the construction sector holds promise in the rest of the world as well.
In Resource Industries, mining orders are on an uptrend, courtesy of improving metal prices. There has been an improvement in heavy construction and quarry and aggregates, particularly in North America and the EAME. This is anticipated to continue through the year. Miners are bringing radical changes to mining operations to increase productivity, reduce costs and are, thus, increasingly relying on autonomous systems. Caterpillar is, hence, enhancing its autonomous capabilities and bringing innovative products into markets that provide it with a competitive edge in mining.
In the Energy & Transportation segment, the Oil & Gas sector is expected to continue to strengthen gradually. The company anticipates improvement in power generation, supported by data center activity, and sales to improve in transportation, courtesy of an increase in rail services and international businesses, and modest growth in the marine business. Industrial is expected to see growth, with activity strengthening across most applications. Overall, sales in 2021 are likely to be robust, backed by improving market conditions. Its ongoing restructuring efforts are also expected to lead to a benefit of $150 million in 2021.
In the first half of 2021, Caterpillar generated Machinery, Energy & Transportation (ME&T) free cash flow of $3.4 billion and remains on track to deliver its ME&T free cash flow target of $4-$8 billion for 2021. Its cash and liquidity position remains strong with the company ending second-quarter 2021 with cash and short-term investments of $10.8 billion. ME&T debt at the end of second-quarter 2021 stood at $9.7 billion.
Caterpillar’s current ratio is at 1.56 and the times interest earned ratio is currently at 6.5. The company recently hiked its quarterly dividend by 8% to $1.11 per share. Its current dividend yield is 2.03% — higher than the industry’s 1.98%. It has a five-year dividend growth rate of 8.6%.
Caterpillar continues to focus on customers and the future by continuing to invest in digital capabilities, connecting assets and job sites along with developing the next-generation productive and efficient products. The company plans to fund initiatives that drive long-term growth focused on areas of expanded offerings and services, and digital initiatives like e-commerce.
Stocks to Consider
Investors interested in the Industrial Products sector can consider better-ranked stocks like Encore Wire Corporation WIRE, Lindsay Corporation LNN and Lincoln Electric Holdings, Inc. LECO. All these companies carry a Zacks Rank #1 at present.
Encore Wire has a projected earnings growth rate of 332.6% for fiscal 2021. So far this year, the company’s shares have gained 45%.
Lindsay has an estimated earnings growth rate of 17.3% for the ongoing year. The company’s shares have gained 35% so far this year.
Lincoln Electric has an expected earnings growth rate of 45.1% for 2021. The stock has appreciated 22% year to date.
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