7 Reasons to Add Caterpillar (CAT) to Your Portfolio Now

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Caterpillar Inc.CAT has delivered better-than-expected result so far this year, driven by continued strength in many of its end markets as well as incessant focus on cost control. Moreover, robust order rates and increasing backlog bode well. Furthermore, positive economic indicators globally and many of the company's end markets are likely to aid this mining and construction equipment behemoth.

Caterpillar's shares have gained 20% in the past year. If you haven't taken advantage of the share price appreciation yet, the time is right for you to add the stock to portfolio as it looks promising and is poised to carry the momentum ahead. The stock has an estimated long-term earnings growth rate of 13.3%.

Stellar Performance in Q2

Caterpillar's second-quarter adjusted earnings per share soared 99% year over year to $2.97 while revenues improved 24% to $14 billion. Both beat the respective Zacks Consensus Estimate. This marked the company's sixth consecutive quarter of both top and bottom-line growth, after a string of dismal performances for four years. Further, Caterpillar's backlog was at $17.7 billion at the end of second-quarter 2018, up $2.9 billion from the prior-year quarter end, aided by increase at all segments.

Since its second-quarter results, Caterpillar's shares have gone up 1.6%, faring better than industry 's increase of 1.1%.

Upbeat Guidance

Robust sales momentum resulting from strong order rates and an increasing backlog bode well for an improved 2018 performance. Considering these factors along with positive economic indicators globally and many of the company's end markets, Caterpillar now anticipates earnings per share between $11.00 and $12.00 for fiscal 2018. The company had earlier provided adjusted earnings per share guidance of $10.25-$11.25 for the fiscal. The mid-point of the new range reflects year-over-year rise of 67%.

Estimates Northbound

Estimates for Caterpillar have moved up in the past 30 days, reflecting the optimistic outlook of analysts. The earnings estimate for fiscal 2018 has advanced 7% while that of fiscal 2019 has advanced 8%.

The Zacks Consensus Estimate for revenues is at $54.4 billion for fiscal 2018, projecting year-over-year growth of 20%. The revenue estimate for fiscal 2019 is pegged at $59.8 billion, projecting annual growth of 10%.

For fiscal 2018, the Zacks Consensus Estimate for earnings is pegged at $11.54, depicting year-over-year growth of 68% while the estimate for fiscal 2019 is at $12.87 displaying year-over-year growth of 12%.

Positive Earnings Surprise History

Caterpillar has outpaced the Zacks Consensus Estimate in the trailing four quarters, delivering a positive average earnings surprise of 31.79%.

Growth Drivers Intact

Caterpillar continues to witness improvement in its end-markets which is anticipated to translate into an improved performance. In Construction Industries in North America, continued improvement in residential and non-residential construction as well as revival in infrastructure demand after many years of underinvestment will drive revenues. President Trump's plans of big spending in infrastructure are likely to bolster Caterpillar's revenues, since it is expected to play a major role in the national infrastructure plan. Notably, infrastructure development in China will also be a catalyst. EAME is anticipated to continue to grow amid high business confidence and stability in oil-producing countries.

Global economic momentum and increasing commodity prices is restoring miners' profitability and these companies are resuming capital spending. This bodes well for the Resource Industries segment. Capital spend will increase for both equipment replacement cycles and expansions. Moreover, higher machine utilization levels should boost aftermarket parts growth. Strong global demand for commodities is also expected to be a positive for heavy construction and quarry as well as aggregate customers. Sales into Oil and Gas applications are projected to increase in 2018, aided by reciprocating engines for gas compression and well servicing activity in North America. The current turbines backlog remains robust in support of the midstream pipeline business.

Sales for industrial applications will remain robust, primarily due to improving global economic conditions and higher end-user demand across most applications. Sales to the Transportation sector will benefit primarily from recent acquisitions in rail services. Rail traffic in North America has improved, with number of idled locomotives and railcars going down. Power Generation sales are improving after a multi-year downturn.

Further, ongoing efforts to reduce costs will help boost margins. Meanwhile, Caterpillar continues to focus on customers and on the future by investing in digital capabilities, connecting assets and job sites along with developing the next generation of more productive and efficient products.

Stock Seems Undervalued

Caterpillar has a trailing 12-month price earnings (P/E) ratio of 14.4 while the industry's average trailing 12-month P/E ratio is 14.7. Based on this ratio, the stock seems undervalued.

Attractive Rank and VGM Score Combination

Caterpillar flaunts a Zacks Rank #2 (Buy) and a VGM Score of B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores.

Such a score allows investors to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 offer the best upside potential.

Other Stocks to Consider

Apart from Caterpillar, investors interested in the industrial products sector may also consider other top-ranked stocks like W.W. Grainger, Inc. GWW , iRobot Corporation IRBT and Lawson Products, Inc. LAWS . All three stocks sport a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .

Grainger has a long-term earnings growth rate of 12.5%. The stock has appreciated 132% in a year's time.

iRobot has a long-term earnings growth rate of 19.5%. Its shares have been up 21% in the past year.

Lawson Products has a long-term earnings growth rate of 17.5%. The company's shares have rallied 32% over the past year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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