Multiple, positive macro factors look poised to meaningfully improve Caterpillar’s (NYSE:CAT) financial results in the first half of 2020. As a result, Caterpillar stock should rise meaningfully during that time.
For several reasons, the U.S.-China trade deal will be a huge positive for Caterpillar. China’s economic recovery, which already began in December, will gather steam. As a result, the company’s construction business in China, which accounts for 5%-10% of the company’s total revenue, will accelerate.
Moreover, Caterpillar’s mining equipment business (the company is the world’s leading maker of mining equipment) will benefit as China’s revival leads to increased global demand for industrial metals like iron ore, copper, and silver. Already, iron ore prices have surged from about $80 in early November to around $92 recently. Similarly, copper prices have jumped from just over $2.50 in early October to over $2.80 recently.
CAT also sells a significant amount of oil and gas exploration equipment. As China’s economy recovers, it will consume more oil, pushing oil prices higher and leading to increased demand for oil exploration equipment. CAT, which also sells farming equipment, should benefit as well from gigantic increases in the amount of American crops purchased by China.
In order to grow all of the crops that the Asian country has promised to buy, American farmers will need to cultivate much more land and buy a great deal more agricultural equipment. Finally, many have suggested that China could import natural gas from the U.S. as part of the trade deal If that scenario materializes, CAT’s natural gas equipment revenue would probably surge.
Dollar Weakness and Caterpillar Stock
The U.S. dollar is starting to weaken. That trend helps Caterpillar stock.
because it makes oil, natural gas, minerals, and even food more expensive in dollar terms. As a result, mining, drilling and farming become more lucrative, increasing demand for Caterpillar’s equipment.
In the last week, America’s currency has lost 1% against a basket of foreign currencies, and it has declined 2.6% over the last three months. According to CNBC, the dollar, “is widely expected to be weaker in the coming year, as other economies do better and catch up to the U.S.”
The business news site added that the dollar “is expected to see at least a single digit (percentage) loss” in 2020. Moreover, President Donald Trump, unlike a number of his predecessors, is actually very much in favor of a weaker dollar, so the Trump administration will not do anything to prevent the dollar from weakening and could even accelerate the process.
Infrastructure, Nonresidential Construction and Caterpillar Stock
Both Caterpillar and JPMorgan analyst Ann Dulgnan are upbeat on U.S. infrastructure spending trends, with Caterpillar CEO Jim Umpleby saying that he has seen “strength in state and local infrastructure.”
Barron’s reporting that Dulgnan “is…bullish on U.S. infrastructure spending.”
Additionally, Associated Builders and Contractors Chief Economist Anirban Basu is also upbeat on U.S. infrastructure spending. citing meaningful spending by states and municipalities to improve the country’s infrastructure.
Meanwhile, the association’s Construction Backlog Indicator increased to nine months in August. Although the association reported that construction spending and employment — two lagging indicators — eased, I believe that the strength of the leading indicator indicates that spending on nonresidential construction will rise meaningfully in 2020.
Of course, easing tariffs will definitely boost that trend as well.
Valuation and Dividend
Caterpillar’s valuation of less than 14 times analysts’ average 2020 earnings per share estimate is a real bargain in this market, where so many stocks are overvalued. And its 2.8% dividend yield will pay investors to wait in case the market takes a while to realize that many macro trends are moving in Caterpillar’s favor.
The Bottom Line on Caterpillar Stock
Caterpillar’s stocks will rise, boosted by the China trade deal, China’s economic recovery, a weaker dollar, and favorable U.S. building and infrastructure trends. In 2020, Caterpillar’s shares should be able to reach at least $180, just $10 above its January 2108 high. Including dividends, that would give investors a total return of nearly 20%. Not bad for a stock that doesn’t pose very much risk.
As of this writing, the author did not own any of the aforementioned securities.
