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Caterpillar might crawl out of metal tariff stomping

After coming out of 2017 as the second best performing Dow component, Caterpillar (CAT) had somewhat a troubled ride this year. There have been a lot of speculations that the construction company would be walloped by President Donald Trump’s newly launched tariffs on industrial materials and potential trade war, along with other companies including Boeing (BA), General Electric (GE) and DowDuPont (DWDP).

Given that three-fourths of the company’s operations take place outside the country, it’s true that Caterpillar is likely to face the heat of these policies. But again, this is a company with strong fundamentals and efficient management, and has shown consistent performance over the past few years. Caterpillar may not be able to pull out another 2017-like rally this year, but it sure has a lot of upside in 2018.

A Caterpillar bulldozer on display
A Caterpillar bulldozer on display (Image courtesy: Aconcagua, Wikimedia Commons)

Look at segment results for example. Retail machine sales improved 33%, and revenue from resources industries jumped as much as 60% in the most recent quarter. While an energy price rebound drove 21% jump in the energy and transportation segment, construction industries witnessed a 27% growth. This is probably why the street keeps ignoring the current weakness in the industry, expecting an annual EPS of $9.15 per share, near the upper leg of the outlook range of $8.25 to $9.25 provided by the company.

Analysts also raised their outlook for 2019 earnings to $10.59 per share, 15% higher than what they expected three months back.

Caterpillar may not be able to pull out another 2017-like rally this year, but it sure has a lot of upside in 2018.

In a recent conference, Caterpillar management said it expects to take advantage of the higher construction prices driven by a weaker dollar and higher raw material costs, which it expects to continue.

The company also sees a lot of space for growth in the residential construction space, even though non-residential construction has hit a threshold for the current period. Apart from this, Caterpillar expects the mining industry to pick up this year driving higher parts sale for the company.

Though currently trading at $147, analysts feel the stock could rally up to $190 in the next one year, given a PEG ratio of just 0.8.

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