How Will Caterpillar Stock Trend Following Q3 Earnings?

Caterpillar (NYSE:CAT) is scheduled to report its Q3 2021 results on Thursday, October 28. We expect Caterpillar to likely post revenue and earnings slightly below the consensus estimates. While a gradual opening up of the economies with a rise in vaccination rate has resulted in a sharp rebound in overall equipment demand over the recent quarters, a trend likely continued in Q3 as well, the company’s overall performance may be weighed down by higher raw material costs and supply chain headwinds. That said, our forecast indicates that Caterpillar’s valuation is $237 per share, which is 17% above the current market price of $202, implying that the stock has more room 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 Q3 2021 revenues to be around $12.4 billion, up 25% y-o-y, but slightly below 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 in 2020, the gradual opening up of economies and resumption of construction activities is likely to have aided Caterpillar’s sales in Q3. Aside  from construction, the company’s other segments – resource industries, and energy & transportation – will likely see a rebound in sales, as well. In fact, even in Q2 2021, Caterpillar’s overall sales were up 29%, led by a sharp 40% jump in construction industries as well as resource industries. Our dashboard on Caterpillar’s Revenues offers more details on the company’s segments.

2) EPS likely to be below the consensus estimates

Caterpillar Q3 2021 adjusted earnings per share (EPS) is expected to be $2.15 per Trefis analysis, compared to $2.20 as per the consensus estimate. Caterpillar’s adjusted net income of around $1.4 billion in Q2 2021 reflected over 2x rise from its $0.7 billion 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 $9.90 compared to $6.56 in 2020.

(3) Stock price estimate above the current market price

Going by our Caterpillar Valuation, with an EPS estimate of around $9.90 and a P/E multiple of around 24x in 2021, this translates into a price of $237, which is 17% above the current market price of around $202. We know that CAT is poised to benefit from an economic recovery, with strong growth in construction industries, and this should bode well for its top-line expansion. And, if the company reports upbeat results, with growth in sales higher 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 has more room for growth, 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.