Will Caterpillar Stock Rise Following Its Q4 Earnings?

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Caterpillar

Caterpillar (NYSE:CAT) is scheduled to report its Q4 2021 results on Friday, January 28. We expect Caterpillar to post revenue and earnings below the consensus estimates. While a gradual opening up of the economies with a rise in vaccination rates has resulted in a sharp rebound in overall equipment demand for the construction industry over the recent quarters, 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 $242 per share, which is 13% above the current market price of $214, implying that the stock has more room for growth, in our view. Our interactive dashboard analysis on Caterpillar’s Pre-Earnings has additional details.

Although CAT stock may trade lower in the near term, based on our Q4 forecast of revenue and earnings falling below the street estimates, it is helpful to see how its peers stack up. Check out how Caterpillar’s Peers fare on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

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(1) Revenues expected to be below the consensus estimates

  • Trefis estimates Caterpillar’s Q4 2021 revenues to be around $12.6 billion, up 12% y-o-y, but below the $13.1 billion consensus estimate.
  • All of Caterpillar’s segments have seen steady growth over the recent quarters, a trend expected to continue in Q4 as well, driven by a 4% rise in industrial production.
  • However, rising labor costs may have weighed on the overall construction activity and, in turn, the equipment demand for the same, adversely impacting the construction segment revenue growth.
  • Looking back at Q3 2021, total revenues grew a solid 25% y-o-y to $12.4 billion, with gains across the company’s businesses. Our dashboard on Caterpillar’s Revenues offers more details on the company’s segments.

(2) EPS likely to be below the consensus estimates

  • Caterpillar’s Q4 2021 adjusted earnings per share (EPS) is expected to be $2.22 per Trefis analysis, compared to the consensus estimate of $2.26.
  • Caterpillar’s adjusted net income of $1.5 billion in Q3 2021 reflected a large 75% y-o-y rise, compared to $0.8 billion seen in the prior year quarter.
  • This growth was driven by higher revenues and higher operating profit margin. The company usually sees a lower operating margin in Q4 vs. Q3, a trend expected in Q4 21 as well. Furthermore, inflationary headwinds and supply-chain constraints remain a concern in the near term.
  • While these headwinds may impact Caterpillar’s earnings growth in Q4, looking forward, for the full-year 2022, we do expect the adjusted EPS to be higher at $12.25, compared to $8.74 in 2020 and an estimated $10.35 in 2021, with easing of inflationary headwinds.

(3) Stock price estimate above the current market price

  • We estimate Caterpillar Valuation to be around $242 per share, which is 13% above its current market price of $214.
  • This represents a P/EBITDA multiple of 15x for the company based on Caterpillar EBITDA for the last twelve months.
  • That said, if the company reports upbeat results, with sales growth as well as 2022 guidance better than the street estimates, it is likely that the P/EBITDA multiple will be revised upward, resulting in even higher levels for CAT stock.
  • Still, there are near term macro risks. With the U.S. Federal Reserve monetary policy-setting meeting coming up on January 26, there are rising concerns of tighter financial conditions that may weigh on the overall markets at large.

While CAT stock may see lower levels in the near term, the Covid-19 crisis 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 Caterpillar vs. eBay.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

 Returns Jan 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 CAT Return 4% 4% 131%
 S&P 500 Return -9% -9% 95%
 Trefis MS Portfolio Return -13% -13% 242%

[1] Month-to-date and year-to-date as of 1/26/2022
[2] Cumulative total returns since the end of 2016

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