Caterpillar, Inc. (CAT) manufactures construction and mining equipment through three product segments: Construction Industries, Resource Industries, and Energy & Transportation, and the Financial Products segment. Production and sale of large industrial work vehicles and machinery are CAT’s main revenue drivers.
CAT reported its third quarter financials on October 27th, which reflects the adverse effect of the pandemic on its operations. The company’s total revenue decreased 23% year-over-year to $9.88 billion. The decline was primarily due to year-over-year decline in revenues from Construction and Resource industries. Profit per share for the quarter declined 54% year-over-year to $1.22. However, CAT displayed strong balance sheet strength with $9.30 billion enterprise cash, up 5.4% sequentially. The company has maintained quarterly dividend payments despite pandemic disruptions.
However, the stock managed to deliver positive returns so far this year based on its fundamental strength. The stock gained nearly 7% year-to-date. CAT is well-positioned to soar in the upcoming months due to the soaring housing and construction industry and a gradual recovery of its sales. This, coupled with several other factors, has helped the stock earn a “Strong Buy” rating in our proprietary ratings system.
Here is how our proprietary POWR Ratings system evaluates CAT:
Trade Grade: A
CAT is currently trading above its 50-day and 200-day moving averages of $155.39 and $134.38, respectively, indicating an uptrend. Moreover, CAT has gained 37.1% over the past six months, reflecting solid short-term bullishness.
CAT’s operating profit increased 25.6% sequentially to $985 million in the third quarter that ended September 2020. The company’s EPS increased 45.2% sequentially to $1.22. The company had more than $14 billion of available liquidity sources over this period. CAT even returned $2.8 billion year-to-date to shareholders through dividends and share repurchases.
Earlier this month, CAT signed an agreement to acquire the Oil & Gas Division of the Weir Group PLC for $405 million.
Buy & Hold Grade: B
In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade takes into account, CAT is well positioned. The stock is currently trading just 8.5% below its 52-week high of $171.26, which it hit on October 20th.
The company’s net revenue grew at a CAGR of 5.3% over the past three years, while EBITDA increased at a CAGR of 14.6% over the same time period. Also, EPS increased at a CAGR of 247.4% in the past three years.
CAT has been displaying strong financial strength since its inception. In fact, for 27 consecutive years, the company has paid higher annual dividends to shareholders and is recognized as a member of the S&P 500 Dividend Aristocrat Index.
Peer Grade: A
CAT is currently ranked #2 out of 60 stocks in the Industrial – Machinery industry. Other popular stocks in the industrial-machinery group are Illinois Tool Works Inc. (ITW), ABB Ltd (ABB), and 3M Company (MMM).
While ITW beat CAT by gaining 10.6% year-to-date, ABB returned 6.2%. On the other hand, MMM declined 8.7% over this period.
Industry Rank: A
The Industrial-Machinery industry is ranked #1 out of the 123 StockNews.com industries. While the deadly virus brought about a temporary halt in its operations, this industry has demonstrated robust recovery over the past couple of months, owing to escalating industrialization and a growing trend of automation. As the demand for Electrical Vehicles (EVs) and housing constructions goes up, the industry is expected to grow even further.
Overall POWR Rating: A (Strong Buy)
CAT is rated a “Strong Buy” due to its short-and-long-term bullishness, solid growth prospects, and underlying financial and industry strength, as determined by the four components of our overall POWR Ratings.
CAT has the potential to soar in the upcoming months despite gaining more than 56% since hitting its 52-week low of $87.50 on March 12th, based on its fundamental strength. The company’s steady recovery from second quarter lows indicates plenty of upside for this stock.
The company is in a position to gain as the economy recovers and the demand for its machineries and services goes up. The consensus revenue estimate of $44.79 billion for the fiscal year 2021 indicates 7.6% growth year-over-year. Analysts expect its EPS to grow 39.7% next year. This outlook should keep CAT’s price momentum alive in the near term.
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CAT shares were trading at $151.08 per share on Wednesday morning, down $6.83 (-4.33%). Year-to-date, CAT has gained 5.38%, versus a 3.61% rise in the benchmark S&P 500 index during the same period.
About the Author: Manisha Chatterjee
Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More…
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