Caterpillar Inc. (CAT) in Peoria, Ill., manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. CAT shares have gained 15.6% in price over the past year and 13.3% year-to-date to close yesterday's trading session at $206.38. Furthermore, Wall Street analysts' $232.67 median price target indicates a potential 12.7% upside from the stock’s last closing price.

Also, a Bernstein analyst recently upgraded the stock to outperform from market perform and boosted his price target to $240. CAT shares climbed on the news. In addition, Deutsche Bank analyst Nicole Deblase raised her price target to $242 earlier this month.

In its last reported quarter, the company outperformed analysts' expectations, bolstered by rebounding construction equipment demand and surging commodity prices. Higher end-user demand and CAT’s fixed-cost-cutting policies helped offset the operational headwinds and deliver solid bottom-line growth. Furthermore, the infrastructure bill recently signed into law by President Biden is expected to boost the company. "CAT is well-positioned to benefit from infrastructure spending in the U.S.," said Cowen analyst Matt Elkott. He listed the stock as one of his best choices for 2022. Also, in October, JPMorgan analysts reiterated an overweight rating on the stock, with a price target of $248 per share, and called the construction equipment maker their "top pick into 2022."

Here is what could shape CAT's performance in the near term:

CAT Looks undervalued at its Current Price level

In terms of forward P/E, CAT is currently trading at 20.59x, which is 7.8% lower than the 22.34x industry average. Also, its 0.77x forward non-GAAP PEG is 55% lower than the 1.71 industry average. And CAT's 14.19 trailing-12-months Price/Cash Flow ratio is 10.2% lower than the industry average.

Solid Third-Quarter Earnings Report

CAT's total sales and revenues increased 25.5% year-over-year to $12.40 billion in its fiscal third quarter, ended September 30. Its operating profit stood at $1.66 billion, up 68.9% from the same period last year. Its profit attributable to common shareholders grew 113.5% from its year-ago value to $1.43 billion. And CAT’s adjusted EPS increased 75% year-over-year to $2.66, topping the consensus estimate by 20.9%.

Profitable

CAT's 10.64% net income margin is 67% higher than the 6.37% industry average. Also, its 19.15% EBITDA margin is 42.8% higher than the industry average. Furthermore, CAT's 32.57% and 6.37% respective ROE and ROA are 139.9% and 23.9% higher than the industry averages.

Dividend Aristocrat

CAT has paid a dividend every year since the company was formed and has paid a quarterly dividend since 1933. The company has increased its annual dividends for 28 consecutive years and is recognized as a member of the S&P 500 Dividend Aristocrat Index. On December 8, CAT announced that a $1.11 per share quarterly dividend will be paid on February 18, 2022. CAT's dividend payouts have increased at a 9.3% CAGR over the past three years and a 6.8% CAGR over the past five years.

POWR Ratings Reflect Growth Prospects

CAT has an overall B rating, which translates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a B grade for Value, which is consistent with its lower-than-industry valuation multiples.

CAT also has a B grade for Growth. The stable top- and bottom-line growth in its last reported quarter justifies this grade.

Of 78 stocks in the Industrial – Machinery industry, CAT is ranked #24.

Beyond what I have stated above, one can also view CAT's grades for Sentiment, Quality, Momentum, and Stability here.

View the top-rated stocks in the B-rated Industrial – Machinery industry here.

Bottom Line

As one of the largest construction equipment manufacturers, CAT is expected to benefit significantly from the Biden administration's infrastructure spending plan. The company has delivered robust bottom-line growth in its most recent quarter. Moreover, analysts expect its EPS to grow 58.5% in the current quarter and grow 32.2% per annum over the next five years. Also, considering its significantly higher than industry ROE, we think the stock could be an ideal investment heading into 2022.

How Does Caterpillar Inc. (CAT) Stack Up Against its Peers?

CAT has an overall POWR Rating of B. However, one could also check out these other stocks within the Industrial – Machinery industry with an A (Strong Buy) rating: Tennant Company (TNC), Crane Co. (CR), and ABB Ltd (ABB).

Click here to check out our Infrastructure Sector Report

CAT shares rose $0.72 (+0.35%) in premarket trading Tuesday. Year-to-date, CAT has gained 15.75%, versus a 29.35% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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