Is Caterpillar stock a buy, sell or hold ahead of upcoming earnings? (NYSE: CAT)

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Summary in seconds

I downgrade my rating for Caterpillar Inc. (NYSE: CAT) shares from buy to hold. In my article for CAT written earlier on February 8, 2022, I reviewed Caterpillar’s financial performance in the last quarter of 2021.

This The latest update highlights CAT’s upcoming Q1 2022 results. I expect Caterpillar’s Q1 net income to be below market expectations. Although Caterpillar is still trading below my price target, the implied capital appreciation potential is not high enough to translate into a Buy rating. As such, I view Caterpillar stock as a hangover ahead of upcoming earnings.

Key indicators of CAT actions

There are two main categories of metrics investors should consider before evaluating Caterpillar’s future financial and market prospects.

The first category of indicators relates to the recent performance of CAT’s stock price on an absolute and relative basis.

Caterpillar stock price performance since the start of 2022

caterpillar

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Year-to-date, Caterpillar’s stock price is up +4.6%, outperforming the S&P 500 which fell -10.0%.

CAT stocks have actually been on a rollercoaster ride in 2022 year to date. During the first half of January 2022, Caterpillar fared much better than the S&P 500 as the market viewed CAT as a key beneficiary of Biden’s new offer. infrastructure bill. December 30, 2021 Looking for new Alphas the article pointed out that “UBS (UBS) prefers construction equipment on the back of the infrastructure bill,” and that reflects Wall Street analysts’ positive sentiment toward Caterpillar earlier this year.

But shares of CAT retreated after mid-January and tracked the performance of the S&P 500 closely through late February. In my previous update for CAT, I noted that “a year-over-year decline in Caterpillar’s operating profit margin was a disappointment” and that it hurt CAT’s share price performance. after publishing its results for the fourth quarter of 2021 at the end of January.

Caterpillar has started to outperform the S&P 500 again in early March, and this came after Russia invaded Ukraine at the end of February, which was one of the main drivers of the rise in commodity prices. Looking for new Alphas published an article on March 8, 2022 that cited Jefferies (JEF) research referring to CAT as one of the “commodity-related machine names” that are “a strong hedge against commodity inflation and general”. In other words, investors see high commodity prices driving up demand for machinery, which will be positive for Caterpillar.

The second category of metrics involves sell-side consensus financial forecasts.

Revisions to Caterpillar’s First Quarter 2022 Financial Estimates Over the Last Three Months

Caterpillar Revisions

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Revisions to CAT’s financial forecast for fiscal year 2022 over the past three months

CAT Revisions

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According to the charts shown above, the majority of Wall Street analysts have raised their Q1 2022 and fiscal year 2022 revenue forecasts for Caterpillar over the past three months, while most have cut their profit estimates for CAT over the same period. This is consistent with what I discussed above. High raw material prices will drive higher sales for Caterpillar, but CAT also faces cost pressures, as underlined by its operating profit margin contraction in the fourth quarter of 2021.

Is CAT stock overvalued now?

Before previewing Caterpillar’s Q1 2022 earnings in the following sections, it’s worth assessing CAT’s valuations in light of the stock price’s year-to-date outperformance versus the S&P. 500.

My price target for CAT is $245, based on a forward P/E multiple of 17.5 times applied to forward earnings per share of $14.00. The forward P/E multiple of 17.5 times is pegged to the stock’s 10-year consensus average P/E for the next twelve months, according to S&P Capital IQ The data. My forward EPS estimate is the company’s average consensus normalized earnings per share for fiscal year 2022-25. Given the cyclical nature of Caterpillar’s business, I have used averages of Caterpillar’s historical P/E multiple and future EPS estimates to value CAT.

The $245 target price for Caterpillar translates to +13% upside from its last stock price of $216.30 on April 22, 2022. Using +15% as the minimum hurdle rate for a investment, I view CAT stock as fairly valued, rather than overvalued or undervalued, now.

When does Caterpillar release its earnings?

Caterpillar issued a press release nearly two weeks ago on April 14, revealing that the company’s first quarter 2022 results will be released on Thursday, April 28, 2022, before market open.

What to expect from the gains?

Expectations for Caterpillar’s first quarter earnings are reflected in the key indicators I discussed in an earlier section of this article.

CAT’s year-to-date share price performance is an indication of both market optimism about strong revenue growth supported by high commodity prices, and concerns investors regarding margin compression. Similarly, the upward revision of Caterpillar’s consensus estimates and the downward revision of CAT’s consensus forecasts in recent months tell the same story.

I agree that Caterpillar’s costs in the first quarter of 2022, not revenues, will determine whether CAT’s upcoming financial results will meet market expectations. I noted in my early February 2022 post that there is “near-term pressure on Caterpillar’s operating profit margin resulting from cost inflation and supply chain issues.”

Things did not have better end of February based on company management feedback to Citigroup (C) World Conference on Industrial Technology and Mobility on February 24, 2022, which occurred approximately one month after CAT’s fourth quarter results.

Caterpillar mentioned at the Citigroup conference that it “would expect a lot of that (inventory accumulation) to go down as the supply chain improves,” but it pointed out that she was “not sure when that will be” and “we’re not seeing anything immediate right now.” In other words, it is evident that supply chain headwinds continued to be an issue for CAT through the end of February. In terms of distribution costs, CAT also acknowledged “we’ve seen a little more airfreight than we’d like”.

In conclusion, I expect a shortfall in Q1 2022 for Caterpillar.

What is Caterpillar’s forecast?

Caterpillar’s first-quarter consensus revenue forecast of $13.5 billion seems reasonable, as it implies a realistic revenue expansion of +13.5% year-over-year. This represents an improvement from CAT’s +11.8% YoY sales growth in Q1 2021, but already suggests a significant decline from Caterpillar’s Q4 2021 revenue increase of +22 .8%.

But CAT’s Q1 2022 EPS on Wall Street consensus of $2.60 still looks too bullish. Given supply chain issues and inflation, a -3.3% QoQ contraction and -9.4% year-on-year decline for Caterpillar’s first-quarter fiscal year net income prices do not fully reflect the cost pressures for the business.

My own estimate of Caterpillar’s first quarter EPS is well below $2.41, indicating a shortfall for CAT.

Is the CAT stock a buy, sell or hold?

CAT action is pending. Caterpillar shares have already outperformed the S&P 500 by a substantial margin so far this year, and my price target for CAT does not imply enough upside to warrant a Buy rating. With my expectations of a shortfall for the stock in Q1 2022, I lower my investment rating for Caterpillar to Hold.

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