Is Caterpillar a good stock to own in 2022?

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Construction equipment maker Caterpillar (CAT) took advantage of the rebound in construction equipment demand and soaring raw material prices and released a strong quarterly report. Bernstein analysts recently upgraded the stock to outperform, while JP Morgan analysts called CAT a “top pick through 2022.” However, given continued supply chain disruptions, will CAT live up to analysts’ expectations? Keep reading for our take.


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Caterpillar Inc. (CAT) in Peoria, Ill., manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives worldwide. CAT shares have gained 15.6% in price over the past year and 13.3% since the start of the year to close yesterday’s trading session at $206.38. Additionally, Wall Street analysts’ median price target of $232.67 indicates a 12.7% upside potential the last closing price of the share.

Additionally, an analyst from Bernstein recently updated the stock outperform market performance and raised its price target to $240. CAT shares soared on the news. Additionally, Deutsche Bank analyst Nicole Deblase raised her price target to $242 earlier this month.

In its latest quarter, the company beat analysts’ expectations, supported by the rebound in demand for construction equipment and soaring commodity prices. Increased end-user demand and CAT’s fixed cost reduction policies helped offset operational headwinds and ensure solid earnings growth. Moreover, the infrastructure bill recently signed into law by President Biden should energize the company. “CAT is well positioned to benefit from infrastructure spending in the United States,” said Cowen analyst Matt Elkott. He listed the stock as one of his top picks for 2022. Additionally, in October, JPMorgan analysts reiterated an overweight rating on the stock, with a price target of $248 per share, and called the construction equipment manufacturer “first choice in 2022.”

Here’s what could shape CAT’s performance in the short term:

CAT looks undervalued at its current price level

In terms of forward P/E, CAT is currently trading at 20.59x, 7.8% below the industry average of 22.34x. Additionally, its non-GAAP PEG of 0.77x is 55% below the industry average of 1.71. And CAT’s trailing 12-month price-to-cash-flow ratio of 14.19 is 10.2% below the industry average.

Strong third quarter earnings report

CAT’s total sales and revenue increased 25.5% year-over-year to $12.40 billion in its fiscal third quarter, which ended Sept. 30. Its operating profit was $1.66 billion, up 68.9% from the same period last year. Its profit attributable to common shareholders rose 113.5% from its value a year ago to $1.43 billion. And CAT’s adjusted EPS rose 75% year over year to $2.66, beating the consensus estimate of 20.9%.

Profitable

CAT’s 10.64% net profit margin is 67% above the industry average of 6.37%. Moreover, its EBITDA margin of 19.15% is 42.8% above the industry average. Additionally, CAT’s respective ROE and ROA of 32.57% and 6.37% are 139.9% and 23.9% higher than industry averages.

Dividend Aristocrat

CAT has paid a dividend every year since the company’s inception and has paid a quarterly dividend since 1933. The company has increased its annual dividends for 28 consecutive years and is recognized as a member of the S&P 500 Dividend Aristocrat Index. On December 8, CAT announced that a quarterly dividend of $1.11 per share would be paid on February 18, 2022. CAT’s dividend payouts have grown at a CAGR of 9.3% over the past three years and to a CAGR of 6.8% over the past five years.

POWR Ratings Reflect Growth Prospects

CAT has an overall rating of B, which translates to Buy in Our Own POWR Rankings system. POWR ratings are calculated by considering 118 separate factors, with each factor weighted to an optimal degree.

The stock has a B rating for value, which is consistent with its lower-than-industry valuation multiples.

CAT also has a B rating for growth. The stable growth in turnover and net income during the last published quarter justifies this rating.

Out of 78 shares of Industrial machinery industry, CAT is ranked #24.

Beyond what I said above, one can also see the CAT ratings for Sentiment, Quality, Momentum and Stability here.

View Top Rated Stocks in Industrials – B-Rated Machinery here.

Conclusion

As one of the largest manufacturers of construction equipment, CAT stands to benefit significantly from the Biden administration’s infrastructure spending plan. The company posted solid earnings growth in its most recent quarter. Additionally, analysts expect its EPS to grow 58.5% in the current quarter and 32.2% annually over the next five years. Additionally, given its significantly higher ROE than the industry, we believe the stock could be an ideal investment heading into 2022.

How does Caterpillar Inc. (CAT) compare to its peers?

CAT has an overall POWR rating of B. However, one can also check out these other industrial machinery industry stocks with an A (Strong Buy) rating: Tennant Company (CNC), Crane Co. (CR) and ABB Ltd (ABB).

Click here to view our infrastructure sector report


Shares of CAT rose $0.72 (+0.35%) in premarket trading on Tuesday. Year-to-date, the CAT has gained 15.75%, compared to a 29.35% rise in the benchmark S&P 500 over the same period.


About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a master’s degree in economics, she gained knowledge in equity research and portfolio management at Finlatics.

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