Caterpillar Inc. Is Worth A Lot More Than Its Current Price

Data source: Caterpillar financials. Chart by author.

Q1 was clearly an exceptionally strong quarter, with margins from Caterpillar's construction-and-mining equipment (resource industries) businesses climbing at a better-than-expected clip to top the company's own long-term targets, thanks mainly to strong sales volumes and higher prices. It's therefore unfair to blame Caterpillar for not expecting the trend to continue. However, not once did management hint at a slowdown in sales or profits, and it's the market's fault to have assumed the extraordinary pace of growth in the first quarter as a new normal for Caterpillar.

What this means for Caterpillar investors

It's important to understand that Caterpillar's top- and bottom-line growth in recent quarters is still coming off a low base as its earnings cycle started to reverse course only in 2017, which is why the company has consistently topped analysts' quarterly estimates by big margins. Caterpillar's fiscal 2018 guidance of GAAP EPS of $9.75 to $10.75 compared with its prior-year earnings of only $1.26 per share explains what I mean by coming off a low base.

Obviously, this pace of growth is not sustainable, and it will likely normalize with time. What matters is the trend in Caterpillar's sales, the best gauge for which, perhaps, is the worldwide retail machinery sales statistics for the previous quarter, which the company releases every month. The chart below shows how Caterpillar's retail sales picked up slack last year and continue to grow at solid double-digit rates.

View photos
A chart showing the growth in Caterpillar's retail machinery sales between November 2016 and April 2018.

Data source: Caterpillar financials. Chart by author.

The most important point to remember is that demand for equipment from each of Caterpillar's key end markets -- construction, mining, oil and gas, and transportation -- is strong, which means it's a broad-based recovery and, hence, likely more sustainable.

Moreover, Caterpillar is squeezing out greater profits from sales than it ever did thanks to aggressive cost-cutting, operational efficiencies, and share repurchases. 2012, for instance, was a banner year for the company as it generated record sales worth $65.88 billion. Yet, it earned a profit of only $8.48 per share off of it. Comparatively, Caterpillar is guiding for what could be its highest-ever EPS for fiscal 2018 on a much smaller revenue base. This matters because cost efficiency is the key to survival and growth for any cyclical company. 

Foolish takeaway

Thanks to its restructuring efforts in the past couple of years, Caterpillar is leaner and stronger than ever before. The company continues to generate solid cash flows, it earned enough operating income to cover its interest on debt six times over in the past 12 months, and is on its way to increase its dividends for the 25th consecutive year. That positions Caterpillar solidly to play the upturn and fetch long-term investors strong returns even at its current valuation of 18 times price to operating cash flow. 

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Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Caterpillar Inc. Is Worth A Lot More Than Its Current Price

Source:ZDNet

Caterpillar Inc. Is Worth A Lot More Than Its Current Price

Caterpillar Inc. Is Worth A Lot More Than Its Current Price

Source:Inc.

Caterpillar Inc. Is Worth A Lot More Than Its Current Price