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Should You Buy Caterpillar Stock After Its Upbeat Q4 Results?

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[Updated: Feb 3, 2022] CAT Q4 Earnings Update

The stock price of Caterpillar (NYSE: CAT) saw a decline of 5% following its Q4 results announcement on Friday, Jan 28. Now, Caterpillar’s Q4 results were actually above ours as well as the consensus estimates. The company reported revenue of $13.8 billion, up 23% y-o-y, and comfortably above our forecast of $12.6 billion and the consensus estimate of $13.1 billion. Similarly, its adjusted EPS of $2.69 was well above our forecast of $2.22 and the consensus estimate of $2.26.

However, what didn’t sit well with the investors was the rising costs and its impact on the company’s operating margins. Caterpillar saw its total operating costs increase 23.7% to $12.2 billion, resulting in a 60 bps decline in operating margin to 11.7%. The rise in costs can primarily be attributed to inflationary pressure. Furthermore, the company’s management in its earnings conference call stated that it expects the margins to continue to face pressure in Q1 as well, and improve thereafter.

Given the outlook on margins, CAT stock has seen some correction over the past few days, and we believe investors will be better off buying into this dip for gains in the long run. We have revised our model to reflect the latest quarterly results, and we now estimate Caterpillar’s Valuation to be around $244 per share, which is 19% above its current market price of $205. This represents a P/E multiple of around 22x based on our $11.25 EPS forecast for 2022. This compares with the $10.81 EPS seen in 2021 and $6.56 in 2020. The valuation multiple of 22x is higher than the comparable average of 19x for the last three years. We believe that a higher multiple is justified for CAT stock, given the strong earnings growth seen in the recent past, a trend likely to continue going forward, as well.

 [Updated: Jan 26, 2022] CAT Q4 Earnings Preview

Caterpillar (NYSE: CAT) is scheduled to report its Q4 2021 results on Friday, January 28. We expect Caterpillar to post revenue and earnings below the consensus estimates. While a gradual opening up of the economies with a rise in vaccination rates has resulted in a sharp rebound in overall equipment demand for the construction industry over the recent quarters, the company’s overall performance may be weighed down by higher raw material costs and supply chain headwinds.

That said, our forecast indicates that Caterpillar’s valuation is $242 per share, which is 13% above the current market price of $214, implying that the stock has more room for growth, in our view. Our interactive dashboard analysis of Caterpillar’s Pre-Earnings has additional details.

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Although CAT stock may trade lower in the near term, based on our Q4 forecast of revenue and earnings falling below the street estimates, it is helpful to see how its peers stack up. Check out how Caterpillar’s Peers fare on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

(1) Revenues expected to be below the consensus estimates

  • Trefis estimates Caterpillar’s Q4 2021 revenues to be around $12.6 billion, up 12% y-o-y, but below the $13.1 billion consensus estimate.
  • All of Caterpillar’s segments have seen steady growth over the recent quarters, a trend expected to continue in Q4 as well, driven by a 4% rise in industrial production.
  • However, rising labor costs may have weighed on the overall construction activity and, in turn, the equipment demand for the same, adversely impacting the construction segment revenue growth.
  • Looking back at Q3 2021, total revenues grew a solid 25% y-o-y to $12.4 billion, with gains across the company’s businesses. Our dashboard on Caterpillar’s Revenues offers more details on the company’s segments.

(2) EPS likely to be below the consensus estimates

  • Caterpillar’s Q4 2021 adjusted earnings per share is expected to be $2.22 per Trefis analysis, compared to the consensus estimate of $2.26.
  • Caterpillar’s adjusted net income of $1.5 billion in Q3 2021 reflected a large 75% y-o-y rise, compared to $0.8 billion seen in the prior-year quarter.
  • This growth was driven by higher revenues and higher operating profit margins. The company usually sees a lower operating margin in Q4 vs. Q3, a trend expected in Q4 21 as well. Furthermore, inflationary headwinds and supply-chain constraints remain a concern in the near term.
  • While these headwinds may impact Caterpillar’s earnings growth in Q4, looking forward, for the full-year 2022, we do expect the adjusted EPS to be higher at $12.25, compared to $8.74 in 2020 and an estimated $10.35 in 2021, with easing of inflationary headwinds.

(3) Stock price estimate above the current market price

  • We estimate Caterpillar Valuation to be around $242 per share, which is 13% above its current market price of $214.
  • This represents a P/EBITDA multiple of 15x for the company based on Caterpillar’s EBITDA for the last twelve months.
  • That said, if the company reports upbeat results, with sales growth as well as 2022 guidance better than the street estimates, it is likely that the P/EBITDA multiple will be revised upward, resulting in even higher levels for CAT stock.
  • Still, there are near-term macro risks. With the U.S. Federal Reserve monetary policy-setting meeting coming up on January 26, there are rising concerns of tighter financial conditions that may weigh on the overall markets at large.

While CAT stock may see lower levels in the near term, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Caterpillar vs. eBay.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Invest with Trefis Market Beating Portfolios

See all Trefis Price Estimates

Finance

Teacher, Police And Firefighter Pensions Are Being Secretly Looted By Wall Street

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America’s severely underfunded public pensions are allocating ever-greater assets to the highest cost, highest risk, most secretive investments ever devised by Wall Street, such private equity, hedge funds, real estate, and commodities—all in a desperate search for higher net returns that, not surprisingly (given the outlandish fees and risks), fail to materialize. Transparency—public scrutiny and accountability—has been abandoned, as pensions agree to Wall Street secrecy schemes that eviscerate public records laws.

Our nation’s state and federal securities laws are premised upon full disclosure of all material risks and fees to investors: “Read the prospectus before you invest,” is the oft-cited warning by securities regulators. Nevertheless, teachers, police, firefighters and other government workers today are not allowed to see how their retirement savings are managed or, more likely, mismanaged by Wall Street.

For nearly a decade, the United States Securities and Exchange Commision has warned investors that malfeasance and bogus fees are commonplace in so-called “alternative” investments and, more recently, Chairman Gary Gensler has called for greater transparency to increase competition and lower fees.

Gensler has asked the agency’s staff to consider recommendations on ways to bring greater transparency to fee arrangements in private markets. “More competition and transparency could potentially bring greater efficiencies to this important part of the capital markets,” he said. “This could help lower the cost of capital for businesses raising money. This could raise the returns for the pensions and endowments behind the limited partner investors. This ultimately could help workers preparing for retirement and families paying for their college educations.”

Gensler has stated he would like to see a reduction in the fees these investments charge and has also commented on industry abuses such as ”side letters” which permit private funds to secretly give preferences to certain investors—preferences which harm public pensions.

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But that’s not good enough to protect public pension stakeholders.

No one—including the pensions themselves—seems to care that the government workers whose retirement security is at risk are being kept in the dark.

The SEC needs to do more—actually alert public pensioners as to those abuses the Commission knows full well are rampant, at a minumum. Advise them, Chairman Gensler, to demand to see and read prospectuses and other offering documents related to their hard-earned savings.

Does the SEC think it’s kosher for Wall Street to conspire with public pension officials to withhold this information from investors—any investors?

Since my 2013 forensic investigation of the Rhode Island state pension exposing gross mismanagement by then General Treasurer Gina Raimondo which I accurately predicted would cost workers dearly; my 2014 North Carolina state pension investigation exposing that $30 billion in assets had been moved into secretive, offshore accounts and, most recently, my investigation of the State Teachers Retirement System of Ohio, I have provided my expert findings to the SEC staff for their review. Each and every public pension forensic investigation I have undertaken has extensively discussed Wall Street secrecy schemes that enable looting. In my book, How To Steal A Lot Money—Legally, I quote disclosures from SEC filings that detail industry abuses.

Join me, Chairman Gensler, in giving government workers a clue, a glimpse, a peek, at the alternative investment abusive industry practices that are carefully guarded by Wall Street and being hidden from them.

Teachers, police and firefighters deserve a fighting chance to protect their retirement savings.

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Finance

It Is Time To Buy Bonds

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US 10-year note prices are likely to rise through August. The monthly histogram below shows that July and August have been the two strongest months for the note price.

Monthly Return- US 10-Year Notes

Blue: Average Percentage Change

Red: Probability of a rise on that day

Green: Expected Return (Product of the first 2)

These numbers are static in the sense that they change little over the years. This is only one cycle, the one-year cycle, whereas there are many cycles operative at any one time. In order to get a reading on such other rhythms, a scan is run to identify other profitable price cycles. The graph below reveals the most valuable cycles that are operative at any one time.

10-Year Note Monthly Cycle

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These cycles reinforce the seasonal tendency for notes to rise. Prices have risen in 60% to 65% of the time in these summer months. With the dynamic cycle also in ascent, the probabilities rise to about 65% to over 70%. There are similar and supportive developments in the Japanese and German fixed income markets.

The cycle projection must be confirmed by market activity. The daily graph reveals that price broke through a downtrend line.

10-Year Notes Broke Through Resistance

Here is a helpful sentiment indicator that supports the bullish view. The cover page of this week’s Barron’s points to much higher rates. Applying contrary opinion, this suggests lower rates and higher note and bond prices. The first objective is 123.0.

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Finance

Will There Be War Over Taiwan – The Next Spy Thriller

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I usually go through a rhythm of reading one or two serious books, followed by a few works of fiction and with summer on the way I wanted to highlight a few of both. In that regard I have just finished Laurence Durrell’s ‘White Eagles in Serbia’, an old-fashioned espionage thriller where the hero Colonel Methuen is dropped behind enemy lines in post war Serbia (he speaks excellent Serbo-Croat) and becomes embroiled in a violent plot to overthrow Tito.

The book is a warm-up to reading Durrell’s ‘The Alexandria Quartet’, a work that nearly won him the Nobel Prize. Durrell was part of an interesting Anglo-Irish family, who largely considered themselves Indian – his brother Gerald, the naturalist and writer, touches on this in ‘My Family and Other Animals’.

Thrillers

Though I am not an expert on these matters, I found ‘White Eagles’ a more realistic account of espionage than much of what we see in the media today (Mick Herron’s ‘Slow Horses’ is good), and overall it is a tale of derring-do that is more in keeping with the work of the founding fathers of the genre – Eric Ambler, John Buchan, Erskine Childers and Ted Allebury for example.

It also made opportune reading given what seems to be an epidemic of espionage – with reports of the Chinese hacking group APT40 using graduates to infiltrate Western corporates and notably the admission by the head of Switzerland’s intelligence that Russian espionage is rife in that country (notably in Geneva – for which readers should consult Somerset Maugham’s ‘Ashenden’ as background material).

These and other trends – such as the outbreak of a heavy cyber battle last week (against Lithuania and Norway for instance) and the increasingly public ‘clandestine’ war between Israel and Iran (they have just sacked their spy chief) point to a world that is ever more contested and complex.

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Secret World

One of the new trends in the space is cyber espionage – both in the sense of stealing state and industrial/corporate secrets, influencing actors (such as the manipulation of the 2016 US Presidential election) and outright acts of hostility such as the hacking of public databases and utilities (i.e. healthcare systems). Here, if readers are looking for some serious literature I can recommend two excellent books – Nicole Perlroth’s ‘This is how they tell me the world ends’ and ‘Secret World’ by Christopher Andrew.

I am personally more intrigued by the difference between a spy and a strategist. A spy’s work could well be described as the pursuit of information about someone who is acting with a specific intent, as well as a sense of their reaction function. There are plenty of examples – from Christine Joncourt (‘La Putain de la Republique’) to Richard Sorge (see Owen Matthews’ ‘An Impeccable Spy’).

In contrast a strategist may try to plot trends and the opportunities, spillovers and damage they may cause. The US National Intelligence department is good in this regard, becoming the first major intelligence agency to publish detailed warnings on the side effects of climate damage.

Spies and strategists might work together, but history is full of examples (LC Moyzisch’s ‘Operation Cicero’) where intelligence fails to make it through the strategic process or is simply ignored for political reasons (might the early warnings on the invasion of Ukraine be an example).

Asia next?

In the spirit of the Durrells and Flemings of the world, what issues might be of interest in terms of digging into unknown knowns and unknown unknowns. Here are a few ideas, most of which are Asia focused (we might see an uptick in Asia focused thrillers).

On the diplomatic front, an interesting recent development was the visit of Indonesian president Joko Widodo to Ukraine, and then Moscow. It was a rare visit to Ukraine by an Asian leader and potentially marks the emergence or at least aspiration of Indonesia (population 273 million) as an emerging world diplomatic player. What has intrigued me so far is that there has been little coordination by the populous emerging (largely Muslim) nations (Nigeria, Indonesia, Pakistan) in the face of high energy and food prices, and that potentially Widodo could play a unifying role here.

Then, still in Asia, but on a more deadly footing, if the Western commentariat is to be believed, China is preparing an assault on Taiwan, and looking to learn from Russia’s military errors in this regard. Other countries are reacting, and I suspect that there will be much intrigue around Taiwan’s ability to acquire sufficiently powerful ballistic missiles that could strike the coastal cities of China, and relatedly how long might it take Japan to produce nuclear missiles (my sources say they could very ambitiously do it in five months!).

So, whilst the espionage literature of the 20th century has tended to be focused on Geneva, Berlin and London in the 21st century we may find ourselves reading about ‘behind the lines’ exploits in Jakarta and Tanegashima.

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