Caterpillar
Caterpillar has been thriving in the post-pandemic economy with a more than 100% gain from its lows off the March 2020 bottom. However, shares are about 20% lower since mid-July as the market seems to have gotten more pessimistic about the economy's growth outlook in 2022. This dip might be creating an attractive, entry point in Caterpillar especially as its earnings continue to come in strong, leading to favorable valuations.
Inside the Numbers
In Q3, Caterpillar reported earnings per share of $2.66, better than expectations of $2.26 per share. It was also a nearly 100% increase from last year's Q3. Revenue also topped expectations at $12.5 billion vs $12.4 billion and was 25% higher than last year.
Operating profit margins came in at 13.4%, a drop from 13.7% in the last quarter. The combination of higher prices and increased volume has led to increased free cash flow generation. This is evident as the company ended the quarter with $19.4 billion in cash, a substantial increase from $10.8 billion at the end of Q2.
The company faced some challenges in terms of rising labor and material costs, higher transportation costs, and supply chain challenges. The company expects these headwinds to persist into next year.
Overall, construction sales were up by 30% to $5.3 billion due to higher end-user demand and dealers choosing to stock higher levels of inventories. Resource, energy and transportation sales increased 32% to $2.4 billion due to increased pricing and higher volumes due to higher end-user demand.
Stock Price Outlook
Caterpillar's shares are considered a proxy for global growth as its customers are connected to cyclical industries like industrial production, housing, construction, infrastructure, and commodity mining. All of these sectors have been strong in a post-Covid economy and look to remain strong over the next couple of years which should be positive for CAT.
Additionally, CAT is quite cheap with a forward P/E of 16 which is less than the S&P 500's
