Caterpillar Stock To Trade Lower Post Q4 Results?

Caterpillar (NYSE:CAT) is scheduled to report its Q4 2020 results on Friday, January 29. We expect Caterpillar to likely post mixed results with revenue beating, while earnings fall short of the consensus estimates, driven by a sequential rebound in construction demand. We expect the company to navigate well based on these trends over the latest quarter.

However, our forecast indicates that Caterpillar’s valuation is around $158 per share, which is 15% below the current market price of around $187. Our interactive dashboard analysis on Caterpillar’s Pre-Earnings has additional details.

(1) Revenues expected to be slightly above the consensus estimates

Trefis estimates Caterpillar’s Q4 2020 revenues to be around $11.35 billion, slightly ahead of $11.25 billion consensus estimate. While the project timelines and cash flows for real estate developers were affected due to the halt in certain construction activities in 2020, impacting Caterpillar’s business, the gradual opening up of economies and resumption of construction activities is likely to have aided sales in Q4. Other than construction, the equipment demand for application in oil & gas is expected to remain much lower when compared to the prior year period. That said, usually Q4 is seasonally stronger for Caterpillar in the oil & gas segment, a trend which likely continued in 2020 as well. Caterpillar’s Q3 2020 sales were down a solid 23% to $9.9 billion, with sales down across segments. Our dashboard on Caterpillar’s Revenues offers more details on the company’s segments.

2) EPS likely to be below the consensus estimates

Caterpillar Q4 2020 adjusted earnings per share (EPS) is expected to be $1.38 per Trefis analysis, compared to $1.49 as per the consensus estimate. Caterpillar’s adjusted net income of around $734 million in Q3 2020 reflected a 51% decline from its $1.5 billion figure in the prior-year quarter. The margins will likely improve going forward, as the construction as well as energy & transportation equipment demand sees a gradual rebound. For the full-year 2020, we expect the adjusted EPS to be lower at $5.35 compared to $11.06 in 2019.

(3) Stock price estimate lower than the current market price

Going by our Caterpillar Valuation, with an EPS estimate of around $5.35 and a P/E multiple of around 29x in 2020, this translates into a price of $158, which is 15% below the current market price of around $187. Although the 29x figure is higher than levels of around 13x seen over the recent years, seemingly making the CAT stock vulnerable to downside risk.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year

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