Caterpillar Inc. (NYSE:CAT) was all over the place Thursday. After the company crushed fourth-quarter earnings estimates before the open, shares were volatile. CAT stock initially ran to all-time highs before pulling back. Ultimately, though, the stock recovered its losses and finished near flat on the session.
So what are we looking at? Caterpillar’s $2.16 in earnings per share came in a whopping 37 cents ahead of estimates. That’s a beat by 20%! Revenue results of $12.9 billion came in almost $1 billion ahead of forecasts and grew ~35% year over year. By all accounts, this was a massive quarter for CAT.
Management’s outlook calls for 2018 earnings between $8.25 to $9.25, excluding restructuring costs. With those costs, though, guidance falls between $7.75 and $8.75, ($8.25 at the midpoint). Analysts’ full-year estimate is only $8.19. It wouldn’t surprise me at all to see CAT beat full-year earnings and sales estimates in 2018.
Evaluating Caterpillar Stock
Given a quarter like this, it’s worth sizing up CAT stock to see if it’s a buy. Some are probably wondering, with such great results, why CAT stock isn’t rallying (at the time of this posting, it’s down nearly 2.3%).
Well, the stagnant price action is likely profit taking. As some investors look to bid up CAT, others are looking to ring the register. It’s worth mentioning that Caterpillar stock is up 75% over the past year and almost 150% over the last two.
Despite this mammoth rally, it’s still worth having a debate on CAT stock. Based on management’s outlook, CAT is trading at about 20 times 2018 earnings. That’s not bad, given that we’re still talking about EPS growth that could close in on 25% should CAT near the upper end of the projected range. Further, revenue is predicted to rise about 10% in 2018, despite a robust 2017.
Management further said it has not factored in a government infrastructure bill for the year. With the White House working on an infrastructure bill, this could be quite positive for CAT this year and for several years down the road. In that sense, current guidance could prove to be too conservative.
It would also be good for companies like U.S. Steel (NYSE:X), US Concrete Inc (NASDAQ:USCR),United Rentals, Inc. (NYSE:URI), Ford Motor Company (NYSE:F), Arconic Inc (NYSE:ARNC), Cummins Inc. (NYSE:CMI) and others.
Trading CAT Stock
So, should we buy CAT stock? Caterpillar has a reasonable valuation and plenty of potential growth ahead of it thanks to the secular recovery around the globe. This helps in every aspect — ranging from mining to commercial construction. Additionally, CAT stock has a 1.85% dividend yield. The new tax bill should favorably impact the company, allowing it to eventually boost its payout and buy back more stock.
When I look at this chart, it’s hard to believe that it’s for a cyclical company like Caterpillar and not a high-flying software company. As you can see, the green 21-day moving average has been support for CAT stock. On Thursday, shares pulled back and bounced right off this mark.
Click to Enlarge
Truthfully, I never consider the 21-day a strong level of support. I view it as an additional catalyst, but not the sole or primary catalyst. In this situation, that’s the case and I don’t think it’s a very strong one. I also don’t like how extended the overall market has become. Any weakness in the Dow Jones Industrial Average or S&P 500 will likely weigh on CAT stock.
However, look at the black trend-line on the chart. This has been very solid support since last March. Should CAT pull back to this level, near $155, bullish investors could buy with a solid risk-reward setup.
Further, the 50-day moving average is close by as well, which should also act as support. On a decline to this level, I’m a buyer.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
