Here's Why You Must Add Caterpillar (CAT) to Your Portfolio

Caterpillar Inc.CAT is riding high on continued improved performance, driven by persistent strength in many of its end markets and incessant focus on cost control. Consequently, share price of this Zacks Rank #1 (Strong Buy) stock has been surging, of late. 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 he momentum ahead. The stock has an estimated long-term earnings growth rate of 13.3%.

Solid Zacks Rank, Score Combination: Caterpillar has a VGM Score of A. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 (Buy), offer the best upside potential.

Upbeat Expectations for 2018: Strong sales momentum resulting from strong order rates, lean dealer inventories and an increasing backlog bode well for an improved 2018 performance. Caterpillar now expects adjusted earnings per share between $10.25 and $11.25 for fiscal 2018 backed by these factors as well as positive economic indicators globally and many of the company's end markets. The mid-point of $10.80 reflects year-over-year rise of 56%.

Performing Ahead of the Industry: The company surged 50.4% over the past year, higher than the S&P 500's growth of 13.7% as well the broader industry 's increase of 47.9%.

We note that the industry is also favorably placed as it occupies a space in the top 17% of the Zacks classified industries (43 out of the 256).

Estimates Northbound: Estimates for Caterpillar have moved up in the past 60 days, reflecting the optimistic outlook of analysts. The earnings estimate for fiscal 2018 has gone up 17% while that of fiscal 2019 has moved up 13%.

The Zacks Consensus Estimate for revenues is at $57 billion for fiscal 2018, exhibiting 18% year-over-year growth. The revenue estimate for fiscal 2019 is at $59 billion, projecting 9.8% annual growth.

For fiscal 2018, the Zacks Consensus Estimate for earnings is pegged at $10.72, depicting year-over-year growth of 55.8% while the estimate for fiscal 2019 of $11.96 displays year-over-year growth of 11.6%.

Positive Earnings Surprise History: Caterpillar has outpaced the Zacks Consensus Estimate in the trailing four quarters, delivering a positive average earnings surprise of 33.4%.

Continued Growth in Construction: The company will benefit from the broad-based growth in Construction Industries in 2018. In North America, continued improvement in residential and non-residential construction as well as revival in infrastructure demand after years of underinvestment will drive revenues. Infrastructure development in China will also be a catalyst. EAME is anticipated to grow amid high business confidence and stability in oil-producing countries. Further, Latin America will continue on its growth path.

Improvement in Mining Activity, Oil & Gas: Global economic momentum and increasing commodity prices is restoring miners' profitability and they are resuming capital spending. This bodes well for the Resource Industries segment.

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. The company anticipates an increase in Transportation primarily from recent acquisitions in rail services. Power Generation sales are forecast to improve after a multi-year downturn. Sales into Industrial applications are projected to rise in 2018 driven by projected demand in EAME.

Cost Cuts, Investment in Digital Capabilities: Ongoing efforts to reduce costs will help boost margins. Meanwhile, Caterpillar continues to focus on customers and on the future by continuing to invest in digital capabilities, connecting assets and job sites along with developing the next generation of more productive and efficient products.

Attractive Valuation: Caterpillar has a trailing 12-month price earnings (P/E) ratio of 18.7 while the industry's average trailing 12-month P/E ratio is 19.0. Based on this ratio, the stock seems undervalued.

Other Stocks to Consider

Some other top-ranked stocks in the sector include Axon Enterprise, Inc. AAXN , DMC Global Inc. BOOM and W.W. Grainger, Inc. GWW . All of these stocks carry the same rank as Caterpillar. You can see the complete list of today's Zacks #1 Rank stocks here .

Axon Enterprise has expected long-term growth rate of 25%. Its shares have surged 167% in a year's time.

DMC Global has expected long-term growth rate of 20%. Its shares have appreciated 218% over the past year.

Grainger has expected long-term growth rate of 12%. Its shares have appreciated 79% 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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