Caterpillar inc. (CAT – Free Report) has impressed investors by delivering growth in both top line and bottom line in recent quarters despite inflationary pressures and supply chain issues. This was facilitated by improving demand in its end markets and cost control efforts. A strong liquidity position and CAT’s continued investments in its expanded digital offerings, services and initiatives are also expected to contribute to growth.
Caterpillar currently has a Zacks Rank #2 (Buy) and a VGM Score of A. Our research shows that stocks with a VGM Score of A or B combined with a Zacks Rank #1 (Strong Buy) or 2 offer the best trading opportunities. ‘investment. You can see the full list of today’s Zacks #1 Rank stocks here.
Let’s dig deeper and analyze the factors that make this stock an attractive bet.
Solid third quarter results and robust backlog levels: Caterpillar’s adjusted earnings per share were $3.95 in Q3 2022, beating Zacks’ consensus estimate of $3.19. The net figure marked a 48.5% year-on-year improvement. Strong demand in most of its end markets and favorable price realization led to improved earnings despite unfavorable manufacturing costs (primarily higher material and freight costs) in the quarter. The backlog at the end of the said quarter stood at $30 billion. This bodes well for CAT’s peak performance in the days ahead.
History of positive results: Caterpillar’s earnings have exceeded the Zacks consensus estimate in each of the past four quarters, averaging 14.7%.
Healthy Growth Projections: Zacks consensus estimate for 2022 revenue is currently pegged at $13.77, suggesting 27.4% growth from the figure released a year ago. The consensus score for FY2023 earnings stands at $14.89, indicating an 8% improvement over the figure reported the previous year. Caterpillar has an estimated long-term earnings growth rate of 12%.
Strong demand to fuel turnover
In North America, demand in the residential and non-residential construction sectors is expected to support demand for Caterpillar construction equipment. Increased investment in roads, bridges, airports and waterways as a result of the US Infrastructure Investment and Jobs Act represents a huge opportunity for CAT.
In the Asia-Pacific region (excluding China), rising commodity prices, strong housing and increased government spending on infrastructure will support construction equipment sales. Increased construction activity will drive demand for machinery in the EAME region and Latin America.
In resource industries, mining orders are on an upward trend, boding well for the resource industries segment. Miners increasingly rely on autonomous systems to improve productivity and reduce costs and emissions. As a result, Caterpillar is improving its autonomous capabilities and bringing innovative products to market.
In the energy and transportation segment, strong order rates across most applications are expected to support revenues in 2022. The industry is expected to experience growth, with activity strengthening across most applications.
Solid balance sheet
Caterpillar expects to generate free cash flow between $4 billion and $8 billion for the Machinery, Energy and Transportation (ME&T) segment this year. Its cash and liquidity position remains strong, as CAT ended the third quarter of 2022 with cash and short-term investments of $6.3 billion. ME&T debt was $9.6 billion. Its ratio multiplied by interest earned has improved significantly over the years and is currently 11.
Earlier this year, CAT increased its quarterly dividend by 8% to $1.20 per share. Clearly, it has maintained its status as a dividend aristocrat, continuing its streak of paying higher dividends to its shareholders for 28 consecutive years. Its dividend yield and payout ratio are higher than those of its peers. Over the past four years, CAT has returned an average of 99% of its ME&T free cash flow to shareholders, consistent with its goal of returning all of its ME&T free cash flow to shareholders over time.
Growth strategies in place
Caterpillar continues to focus on customers and the future by steadily investing in digital capabilities, connecting assets and jobsites, and developing productive and efficient next-generation products. CAT constantly invests in expanding its offerings and services, and in digital initiatives such as e-commerce to drive long-term growth.
Image source: Zacks Investment Research
Caterpillar shares have gained 20.3% in the past year against industry growth of 17.8%.
Other actions to consider
Some other leading stocks in the industrials sector are Enerpac Tool Group (EPAC – free report), Hubbell (HUBB – free report) and WW Grainger (GWW – free report). While EPAC and HUBB sport a Zacks rank of 1, GWW currently holds a Zacks rank of 2.
Enerpac Tool Group has a profit growth estimate of 44.6% for the current year. Estimates have remained unchanged over the past 30 days. Shares of EPAC rose 14.6% during the year. It has a four-quarter surprise of 3.4% on average.
Hubbell has an average earnings surprise of 10.6% over the past four quarters. The stock has gained 28.4% over the past year. HUBB’s earnings growth estimate for fiscal 2022 is 6.7%. The consensus mark has been revised up 4.8% in the past 30 days.
WW Grainger has a four-quarter surprise of 10.1% on average. Zacks’ consensus estimate for GWW earnings in 2022 is 16.6% growth from the figure reported a year ago. The consensus estimate has risen 4.1% over the past 30 days. The stock has jumped 22% over the past year.