Caterpillar (NYSE:CAT) stock has lost one-quarter of its value since the end of May, thanks to the Delta variant of Covid-19.
The pandemic has stalled the boom in infrastructure spending that was expected to follow the pandemic. The Congressional delay in getting that spending approved hasn’t helped. Neither have Caterpillar’s own supply chain problems.
But the boom is coming. While you wait for it you can own one of the great value stocks of our time.
CAT stock trades at about $189, with a market cap of nearly $105 billion and a price-to-earnings ratio of 24. Investors are also catching dividends yielding 2.3% this year. It’s less than 2.5 times the company’s sales.
Analysts have taken notice and have begun publicly pounding the table for CAT stock. JPMorgan Chase (NYSE:JPM) now calls CAT stock its top pick for 2022. TV analyst Stephanie Link of Hightower Advisors has been telling CNBC viewers to buy it.
This isn’t new. Analysts were telling investors to ride the construction boom with CAT stock back in August. Most analysts at Tipranks want you to buy it, with a price target 24% higher than its current price.
You can’t blame earnings for the stock’s fall. Second-quarter revenue rose 29% from a year earlier. Earnings were an adjusted $2.60/share, which beat street estimates. During the quarter Caterpillar handed shareholders $800 million in buybacks and dividends.
Caterpillar also crushed estimates in its first quarter. The sell-off began a month after the announcement.
Why CAT Stock Fell
There are three reasons cited for the stock sell-off. Raw material prices are rising, growth in China is slowing, and at its (then) high of $244, the stock was getting ahead of itself.
Caterpillar is seen less as a value stock than a cyclical. It rises and falls with economic activity and anticipated activity.
The Asia/Pacific region led sales gains in the first quarter, but they were flat in the second quarter. North America saved the second quarter but may not save the third, bears say. Better days are ahead, screamed Barron’s after those second-quarter numbers came out. Investors decided that meant today wasn’t too good.
Analysts now expect revenue of $12.48 billion when CAT reports Oct. 28. That would be down $500 million from the second quarter. The “whisper number” on revenue is even lower, $12.34 billion, but earnings are still expected at around $2.27 per share.
The sell-off in construction equipment stocks has been general. Deere (NYSE:DE) is down 11.6% in the last six months. Cummins Engine (NYSE:CMI) is down 10.4%. But it’s CAT that has been getting hurt worst, down almost 17% since April.
The Bottom Line
When the market offers you a bargain, take it.
Some investors estimate CAT stock is currently undervalued by as much as 31%. The company isn’t just sitting on its gas engines. It bought a carbon capture firm called CarbonPoint just last month. It plans to offer a generator running on 100% hydrogen.
CAT is still not a green equipment company. The hydrogen generator uses “blue” hydrogen, derived from natural gas. Capturing carbon isn’t the same thing as not putting it into the atmosphere.
I’m as perplexed as anyone by what Caterpillar stock is doing. But just as nature abhors a vacuum, the stock market abhors a bargain. Buy it.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at firstname.lastname@example.org or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.