Caterpillar (NYSE:CAT) is scheduled to report its Q2 2020 results on Friday, July 30. We expect Caterpillar to likely post revenue and earnings below the consensus estimates. While a gradual opening up of the economies has resulted in a sharp rebound in overall equipment demand over the recent quarters, a trend likely continued in Q2 as well, the company’s overall performance may be weighed down by higher raw material costs and supply chain headwinds. Furthermore, going by our Caterpillar valuation of $219 per share, which is just 4% above the current market price of $210, there is only a little room left for growth, in our view. Our interactive dashboard analysis on Caterpillar’s Pre-Earnings has additional details.
(1) Revenues expected to be below the consensus estimates
Trefis estimates Caterpillar’s Q2 2021 revenues to be around $12.1 billion, compared to the $12.6 billion consensus estimate. While the project timelines and cash flows for real estate developers were affected due to the halt in certain construction activities, especially in Q2 2020, impacting Caterpillar’s business, the gradual opening up of economies and resumption of construction activities is likely to have aided sales in Q2. Other than construction, the company’s other segments – resource industries, and energy & transportation – will likely see a rebound in sales, as well. In fact, even in Q1 2021, Caterpillar’s overall sales were up 13%, led by a sharp 27% jump in construction industries, while resource, and energy & transportation revenues grew 6% and 4%, respectively. Our dashboard on Caterpillar’s Revenues offers more details on the company’s segments.
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2) EPS likely to be below the consensus estimates
Caterpillar Q2 2021 adjusted earnings per share (EPS) is expected to be $2.32 per Trefis analysis, compared to $2.38 as per the consensus estimate. Caterpillar’s adjusted net income of around $1.6 billion in Q1 2021 reflected a 74% rise from its $911 million figure in the prior-year quarter. This can be attributed to higher revenues and expansion of margins. However, as we look forward, a pressure on the company’s margins is anticipated, given inflated raw materials costs, and continued supply chain challenges. For the full-year 2021, we expect the adjusted EPS to be higher at $9.72 compared to $6.56 in 2020.
(3) Stock price estimate slightly above the current market price
Going by our Caterpillar Valuation, with an EPS estimate of around $9.72 and a P/E multiple of around 22x in 2021, this translates into a price of $219, which is just 4% above the current market price of around $210. We know that CAT is poised to benefit from an economic recovery, with growth in construction industries, and this should bode well for its top-line expansion. However, we believe that the positives are largely priced in the current stock value of $210 per share, in our view, implying there is not much room for growth for CAT stock in the near term. That said, if the company reports upbeat results, with recovery in sales faster than our estimates, and the guidance for the full-year is revised upward, it will result in CAT stock seeing higher levels.
While CAT stock may have only a little room left for growth in the near term, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for 3M vs. Ingevity.