How Caterpillar (CAT) Stock Stands Out In A Strong Industry

Shares of Caterpillar Inc. (CAT - Free Report) were sideways through morning trading Monday after the company released its Q2 earnings report.

CAT saw its earnings surge 89% to hit $2.82 per share, which outpaced our Zacks Consensus Estimate of $2.66. The firm’s revenues of $14.01 billion also surpassed our projection of $13.77 billion. Caterpillar upped its full-year guidance to a range of $11 to $12 per share, which, even at the lower end, is higher than our current $10.75 estimate.

But as strong as Caterpillar’s report was, it was dragged down by the Trump administration’s tariffs.

Making America Great Again is Hurting Caterpillar

Shares of CAT have had a solid run over the last 12 months, gaining 26.3% compared to a 4.5% industry average. But the company has recently faced some difficulties, shedding 8.7% on a year-to-date basis, which is in line with industry peers.

Caterpillar also posted a strong Q1 earnings report, but the common concern across both periods is the sizable hit to margins caused by material cost inflation. In March, President Trump imposed a 25% tariff on steel and 10% tariff on aluminum. Mr. Trump went on to state that the measure would be in place for “a long period of time."

CAT said in its latest earnings report that the tariffs will chop off between $100 million and $200 million in revenue in the second half of the year. The company also noted that higher freight costs and increased spending for targeted expenses are set to offset otherwise higher transportation sales.

The firm will announce mid-year price increases to counter the impact of higher costs.

Don’t Fret Just Yet

Even in the face of recent concerns, Caterpillar has seen positive earnings estimate revisions across the board. Projections for Q3 currently stand at $2.59 per share, while full-year estimates are $10.75, ticking up a cent in the last week. Investors should note that further revisions could be made now that the firm has reported its Q2 results.

Caterpillar remains well-positioned to capitalize on various tailwinds across each of its segments. The company continues to see “increasing sales volume, favorable price realization, and lower short-term incentive compensation expense,” according to its release. Moreover, demand is expected to continue growing as the company’s backlog increases and infrastructure spending in the U.S. and China ramps up.

CAT has now beat earnings expectations for the last 13 quarters and raised guidance for the second successive quarter. Caterpillar is also expected to return value to its investors through a new round of share repurchases set to begin in January 2019. The current $10 billion plan, which expires this year, has $4.5 billion left in repurchases to be made.

Looking Ahead

While the tariffs are a notable source of concern for investors, Caterpillar remains well-positioned for continued growth. Strong value-driven initiatives and well-executed price increases will allow CAT to remain a compelling investment in the months to come. But if rates in infrastructure spending, housing starts, and commercial construction begin to waver, Caterpillar might be one of the first to feel the burn.

Recent earnings estimate revision activity have left Caterpillar sitting at a Zacks Rank #2 (Buy), although this could change after Monday’s earnings release.

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How Caterpillar (CAT) Stock Stands Out In A Strong Industry


How Caterpillar (CAT) Stock Stands Out In A Strong Industry