What’s Next For Caterpillar Stock After A Mixed Q2?

Caterpillar stock (NYSE: CAT) reported its Q2 results last week, with earnings coming in above ours and the street estimates. However, CAT stock has seen a fall of around 5% in a week, and after the recent fall, we believe CAT stock has more room for growth and may see higher levels, as discussed below.

Caterpillar’s revenue of $14.2 billion in Q2 was up 11% y-o-y, and its EPS of $3.18 reflected a 22% growth. This compares with our estimates of $14.1 billion and $2.92, respectively. The revenue growth was led by higher sales for its resource industries and energy and transportation segments, rising 16% and 15%, respectively, while construction industries sales were up 7%. The supply chain disruptions and lockdowns in China due to increasing Covid cases weighed on the overall revenue growth.

Overall, Caterpillar’s Q2 results were good, and it expects to see sales growth and margin expansion over the next few quarters, with pricing growth more than offsetting the rise in costs. The demand for industrial equipment is expected to remain strong. One significant factor that will likely aid Caterpillar’s sales in the near term is the high commodity prices, which translates into higher capital spending for miners, bolstering the demand for Caterpillar’s mining equipment. The resource industries was the best performing segment for Caterpillar in Q1 and Q2, led by a high end-user demand for heavy construction and mining equipment.

Given the recently announced results and outlook, we have updated our model and revised our estimates. We expect full-year 2022 revenue to be $57.4 billion and earnings to be $12.48 on a per share and adjusted basis. We maintain our  Caterpillar valuation of $235 per share, reflecting a 27% upside from its current market price near $185, implying that investors may be better off using the recent dip to enter CAT stock for gains in the long run.

Our valuation is based on a forward P/E ratio of under 19x based on our earnings forecast of $12.48 on a per-share basis for full-year 2022. At its current levels, CAT stock is trading under 15x its forward earnings, compared to the last three-year average of 19x, implying more room for growth.

But what about the near term?

Although CAT stock has seen a fall of 5% in a week, it’s still up 4% in a month. Will it continue its upward trajectory, or is a fall imminent? Going by historical performance, there is a higher chance of a rise for CAT stock over the next month. A move of 4% in a month has occurred 854 times in the past ten years. Of those 854 instances, 496 resulted in CAT stock rising over the subsequent one-month period (twenty-one trading days). This historical pattern reflects 496 out of 854, or about a 58% chance of a rise in CAT stock over the next month. See our analysis of Caterpillar Stock Chance of Rise for more details.

Calculation of ‘Event Probability‘ and ‘Chance of Rise‘ using the last ten years’ data

• After moving -5% or more over five days, the stock rose on 51% of the occasions in the next five days.
• After moving 2% or more over ten days, the stock rose on 52% of the occasions in the next ten days.
• After moving 4% or more over a twenty-one-day period, the stock rose on 58% of the occasions in the next twenty-one days.

This pattern suggests a slightly higher chance of a rise in CAT stock over the next five, ten, and twenty-one days.

Caterpillar (CAT) Return (Recent) Comparison With Peers

• Five-Day Return: TEX highest at 6.2%; ASTE lowest at -10.3%
• Ten-Day Return: TEX highest at 12.2%; ASTE lowest at -4.6%
• Twenty-One Day Return: TEX highest at 26.4%; CNHI lowest at -2.6%

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Marine Products vs. Tempur Sealy.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

[1] Month-to-date and year-to-date as of 8/9/2022
[2] Cumulative total returns since the end of 2016

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