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Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The industrial conglomerate’s stock price has more than doubled over the last couple of years, driven largely by:improved marginsimproved global sentiment strong revenue growth. Upbeat Metal commodity prices and energy prices have further aided the demand for the company’s products. This has helped the company’s stock price increase from under $60 in early 2016 to around $135 now
In this dashboard, Trefis analyses the key factors that have helped Caterpillar’s stock price to more than double in the last couple of years.
How Has Caterpillar's Stock Performed Compared To Major Price Indices Over Recent Years?
Caterpillar Stock Prices
S&P Price Index
Dow Jones Industrial Price Index
Caterpillar’s stock price has increased from $62 at the beginning of 2016 to around $135 now. This translates to a growth of roughly 120%.
Caterpillar has outperformed major indices such as S&P 500 and Dow Jones Industrial Average.
Over the same period, Dow Jones Industrial Average grew by 65% while S&P 500 could manage a growth of roughly 50%.
Reason #1: Caterpillar's Operating Metrics Have Improved Considerably Since 2016
Caterpillar Has Witnessed Strong Revenue Growth Post 2016
Total Sales and revenues
Change In Total Sales and revenues (y-o-y)
After plunging 18% in 2016, Caterpillar's revenues jumped by more than $16 billion over the next 2 year at an average annual rate of 19%.
- Construction industry has been the largest growth driver, adding $7.5 billion to total revenues - contributing roughly 46% to the total revenue growth.
- However, Resource segment has been the company’s fastest growing segment over the recent years, adding more than $4 billion in revenues since 2016, driven by higher equipment demand, favorable price utilization and increased services.
Operating Profit increased 7x
Total sales and revenues [A]
Total operating costs
Operating profit has gone up 7x since 2016, jumping from $1.16 billion in 2016 to more than $8.2 billion in 2018
Strong revenue growth, lower tax rate boosted the bottom line
Net Income = [ A x B ]
Net Income Margin [ A ]
Total sales and revenues [ B ]
Net profit has shot up from -$700 million in 2016 to more than $7.8 billion in 2018. This growth can be primarily attributed to increased construction revenues in Asia, (particularly China) and a reduction in tax rate.
Asia pacific construction sales grew more than 72% since 2016, increasing from $3.7 billion to roughly $6.5 billion in 2018.
Higher net income has pushed Caterpillar's EPS figure considerably higher over recent years
EPS = [ A / B ]
Net Income [ A ]
Shares Outstanding [ B ]
Caterpillar’s net margin has increased from -0.2% in 2016 to more than 11% in 2018 driven by a combination of strong revenue growth and lower tax rate.
Reason #2: Caterpillar's Stock Price Is Highly Correlated To Metal & Oil Prices
How do changes in Caterpillar's stock price compare with changes in Metal prices?
Caterpillar Stock Price
Metal Price Index
Metal prices have gone up 40% over the last couple of years - increasing from $56 in 2016 to more than $78 as of June 2019.
An increase in metal prices have led to an increase in mining activities globally, in turn boosting the demand for Caterpillar’s mining- and quarry-related products.
We believe that there is a direct positive correlation of 0.9 between the commodity metal prices and Caterpillar stock prices. An increase in the metal prices provides a boost to the company’s resource industries revenues, thus helping the stock price movement.
How do changes in Caterpillar's stock price compare with changes in Energy prices?
Caterpillar Stock Price
Energy Price Index
Energy prices have gone up by 53% over the last couple of years- increasing from $48 in 2016 to more than $73 as of June 2019.
Higher energy prices coupled with strong demand for power generating products has led to a higher demand for Caterpillar’s energy product and related parts.
We calculate a positive correlation of 0.8 between energy prices and Caterpillar stock prices. An increase in energy prices provides a boost to the company’s energy industries revenues, thus supporting the stock price movement.
Conclusion: Caterpillar's Stock Still Offer A Sizable Upside
Strong commodity market fundamentals, robust demand from the Asia-Pacific region, higher demand levels for non-residential construction activities and increased demand for heavy construction, quarry and aggregate equipment will aid Caterpillar’s growth over the foreseeable future. This should support the stock price movement in the near termMoreover, the proposed infrastructure legislation in the U.S., if implemented, could further provide a boost to CAT’s margins and revenuesWe value the company at about 13x projected FY'19 EPS – similar to its current trading multiple of 13x, but higher than the industry-average trading multiple of 11.5x.Based on our forecast, Caterpillar’s adjusted EPS for fiscal 2019 is likely to be around $11.88. Using this figure with our estimated P/E ratio of 13x, this works out to a price estimate of $153 for Caterpillar’s shares, which is roughly 10% ahead of the current market price.
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