Caterpillar Expects Earnings and Stock Price Increase Following US Infrastructure Bill Passage

Industrial Machinery Manufacturer

Construction Market Indicators Improve
Expecting Benefits from US Infrastructure Bill Passage

[Asia Economy Reporter Minji Lee] Caterpillar, a manufacturer of industrial machinery and equipment, is expected to continue its strong performance in the fourth quarter. With positive construction market indicators and the U.S. House of Representatives passing the infrastructure bill, the stock price is predicted to maintain an upward trend.

On the 27th, Caterpillar's stock price recorded $198.73 as of the previous day, rising 1.33% recently. Although it dropped about 4% in one day due to the spread of a new variant virus, it showed a relatively better stock performance compared to other stocks. The passage of the U.S. Democratic Biden administration’s green and infrastructure bill in the House is believed to have been reflected in the stock price as a direct benefit.

The recently announced third-quarter revenue was $1.24 billion, and adjusted EPS was $2.66, growing 25% and 75% respectively compared to the same period last year, showing significant growth year-over-year. By segment, construction machinery recorded $5.26 billion, and the energy transportation sector posted $5.08 billion, increasing 29% and 22% year-over-year respectively. The resources and financial products divisions also grew by 32% and 5.2%, recording $2.41 billion and $760 million respectively.

By region, the North American market, which showed strong momentum in residential and non-residential construction, and the Latin American market, benefiting from the base effect of the previous year, grew 28% and 76% respectively. On the other hand, sales in the Asia-Pacific region slowed as China’s construction equipment demand softened compared to the booming second half of last year. Dongheon Lee, a researcher at Daishin Securities, explained, “Operating profit grew significantly due to increased volume and price hikes despite rising raw material costs, and considering the increase in material and freight costs and unit incentive expenses, the operating margin recorded 13.7%.”

Although Caterpillar did not provide performance guidance for the fourth quarter considering the high liquidity environment, it presented an overall bright outlook. There is a margin pressure risk as manufacturing costs in the construction machinery sector are expected to be fully reflected, but it is predicted that these costs can be passed on to product prices.

So far, Caterpillar’s stock price has shown a high correlation with construction market conditions and industrial metal prices. Construction market indicators continue to improve, and raw material prices remain at relatively high levels compared to the past. As equipment utilization rates and operating hours increase for construction and resource development companies, strong demand is expected to support stock price gains in the fourth quarter.

Additionally, the passage of the $1 trillion U.S. infrastructure bill in the House is expected to bring benefits. The full-scale implementation of infrastructure investment is predicted to begin in the fourth quarter of this year. Currently, Caterpillar generates 43% of its revenue from the North American region. Compared to competitor Komatsu (35%), Caterpillar is expected to be more significantly affected by increased equipment demand from U.S. infrastructure projects. Deere & Company has a higher U.S. revenue share at 52%, but since it focuses more on agricultural machinery manufacturing, the proportion of construction or infrastructure-related equipment in its sales is relatively low at 23%.

Researcher Jaeim Kim stated, “Caterpillar’s 12-month forward price-to-earnings ratio (PER) is 17.1 times, positioned in the middle of its historical band,” and predicted, “With valuation pressure significantly eased compared to the beginning of the year, considering the potential for earnings rebound, it is judged to be a stock with high upside potential.” Meanwhile, recently, U.S. investment bank Baird raised Caterpillar’s target price to $290, citing that the stock is relatively undervalued considering its earnings potential through 2023.