Caterpillar is on Sale






It's been a rough year for shares of Caterpillar (CAT), which are currently trading 25% below their all-time highs which were reached in January. Despite several consecutive earnings beats and continually improving guidance, investors seem to be focusing on the negative effects of the trade war, with tariffs on both sides raising both the costs of raw materials used by Caterpillar and the net cost of their finished goods sold in overseas markets.


Actual results at Caterpillar could hardly be better. After reporting a record first quarter, CAT improved on those results in Q2 and significantly raised guidance for the second time in a row. Expected to earn $2.66/share, the company posted a net of $2.97/share on $14B in revenue. Those numbers represent gains of 24% in sales and almost 100% in earnings compared to the second quarter of 2017.


In addition to top and bottom line beats, CAT reported an increase in operating profit - from $1.2B in 2107 to $2.2B, a favorable impact from currency transactions and a lower effective tax rate. Increased operating cash flows allowed the company to raise the quarterly dividend 10% to $0.86/share. Even after accounting for an expected $100-200 million dollar impact from tariffs and higher materials and freight costs, CAT raised full-year earnings guidance for the second quarter in a row to a range of $10.50-$11.50/share. Guidance had previously been $9.75 - $10.75/share.


The company expects to offset these higher costs "through announced mid-year price increases and using the Operating & Execution Model to further drive operational excellence and structural cost discipline."


In addition to the 2.5% dividend yield, CAT is aggressively returning cash flow to shareholders though the remainder of a previously announced share repurchase program which has $4.2B remaining in 2018, and an additional $10B buyback which was recently authorized by the board to begin in 2019 with no expiration date.


Though the markets seem to be focusing on a potential slowdown in global growth when it comes to Caterpillar, the company stated that "Most end markets continue to improve, order rates are healthy, and the backlog remained solid in the quarter. For certain applications, particularly in oil and gas mining, the company is seeing strong demand and taking orders for delivery well into 2019."



While the market reaction to two blowout quarters has been somewhat inexplicable, analysts have been steadily raising their estimates with 10 upward revisions in the past 30 days, earning CAT a Zacks Rank #1 (Strong Buy). Trading at a forward P/E ratio of less than 12X - considerably lower than the S&P 500 at 18X, Caterpillar is a legitimate value opportunity.

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