How Much Could Caterpillar’s Stock Gain If It Successfully Achieves Its Q4 Cost-Reduction Target?

Caterpillar’s (NYSE: CAT) stock price fell roughly 3% when the company posted a rather soft results for its Q3 2019 earnings. The company missed consensus estimates on earnings and revenue by a margin, and also lowered its full-year outlook. Despite the bad news, the stock recovered over trading on the day of the earnings announcement, and ended the day 1% higher than its opening price. The primary reason for the subsequent rally in the company’s stock was the assurance provided by the management that the company would cut production to match dealer demand.

Trefis quantifies the impact of Caterpillar’s cost-cutting efforts on its stock price in its interactive dashboard What Is The Upside To Caterpillar’s Stock if it Can Reduce Costs In Q4’19? We conclude that if Caterpillar can stick to its cost target for Q4 2019, then the fair value of its stock would be $147, as opposed to a figure of $143 in case costs remain at the levels expected before the latest announcement.

How Is Caterpillar’s Stock Likely To Benefit?

Lower Production Levels Coupled With Cost-Cutting Measures Should Lift Caterpillar’s Bottom Line

• The primary factor that hurt the company’s performance in Q3 was lower volume driven by reductions in dealer inventory and lower-than-expected demand from end-users.
• In a bid to adapt quickly to the changing market conditions, the management has vouched to cut production to match dealer demand.
• If the management is successfully able to cut costs and reduce production levels, it would positively impact the company’s bottom line.
• As a result, we expect the company’s net margin to improve from our existing forecast of 12.1% to nearly 12.4%. This should push Caterpillar’s EPS towards the higher end of its guidance range of $10.90 to $11.40 for the year.

This Could Have A Small Positive Impact On Caterpillar’s Share Price 

• Based on our existing forecast, we estimate the company’s adjusted EPS for full-year 2019 is to be around $11.14. Using this figure with our estimated forward P/E ratio of 13x, this works out to a price estimate of $143 for Caterpillar’s Stock.
• However, the proposed cost-saving measures could improve the EPS figure for FY’2019 to $11.40. Using this figure with the P/E ratio of 13x, Caterpillar’s share could be worth $147, an increase of about 3% from our base case scenario.

Additional details about how Caterpillar’s segment revenues have trended over recent years along with our forecast for 2019 can be found in out interactive dashboard.

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