Caterpillar Pulls Back To An Attractive Support Level
The analysts have yet to come out with any commentary in the wake of Caterpillar’s (NYSE: CAT) Q4 results which is a telling message in and of itself. The results were mixed and reveal the pressure of inflation but it seems the analysts are sticking to their outlook which favors outperformance in 2022. In our view, Caterpillar is a high-quality dividend-growth stock and well-positioned within a sector expected to lead the market in terms of earnings growth this year. In that light, it’s no surprise the consensus rating is a Buy with a price target more than 22% above the current price action.
As for the consensus ratings, the data from Pricetargets.com shows the consensus estimate and rating have been creeping higher over the past year and we expect that trend to continue well into 2022. Based on the institutional activity, we see this stock moving up to test the high-price target of $270 which adds another 12.5% on top of the consensus $240. Institutional activity has been robust in this stock this year with the total value of buying and selling worth nearly $19.5 billion or about 18% of the market cap. The takeaway is the net of buying and selling is $3.02 billion or about 2.75% of the market cap in favor of the bulls. This puts total insider holdings near 67.2% and growing.
Caterpillar Had A Strong Quarter But Inflation Is Still Present
Caterpillar had a strong quarter and one that points to ongoing demand for its products and services but inflation cut deeper than expected into the outlook for 2022. The company reported $13.8 billion in net revenue for a gain of 23.2% over last year but margins contracted at the gross and operating levels. The good news is that revenue beat the consensus by 440 basis points on double-digit increases in all major segments. Construction and Resource machinery product sales grew by 27% each while Energy grew 19% and Financial a smaller 4.0% with volume and pricing/rice realization cited repeatedly throughout the report.
Moving down, the operating margin contracted by 600 basis points since last year’s Q4 due to rising freight, material, and labor costs. The margin came in at 11.7% versus the 12.3% posted last year and offset the revenue strength on the bottom line. The silver lining is that comparability factors, one-off events, and revenue strength left the adjusted earnings at $2.69 and $0.43 ahead of the consensus estimates with demand still strong in all segments.
Looking forward, the company did not give any formal guidance but did comment to the effect inflationary pressures were persisting into the Q1 period and would have an impact on earnings. Execs are working on another round of price increases, however, that should fully offset those pressures (so they say) by the end of the year.
Caterpillar’s Dividend Is Safe And Growing
Although there are some negatives in the Caterpillar report the report is good and reveals ongoing strength in the business. Margin may come under pressure in the near-term but earnings are still robust and the long-term outlook has margins expanding back to their recent peaks leaving the dividend more than safe. The company is sitting on more than $9.3 billion in cash with cash on the rise after paying $5.0 billion in capital returns this year alone. In our view, investors should count on buybacks and dividends to continue in 2022 and for the company to make is 9th consecutive dividend increase during the summer of 2022.
The Technical Outlook: Caterpillar Pulls Back To Support
Shares of Caterpillar fell in the wake of the earnings report and now trading at a key support level. Support is already evident at this level so we expect it to hold prices up and lead to a rebound or reversal over the next few weeks and months. Longer-term, we see this stock rising up from this support level on strong results, positive outlook, widening margin, share repurchases, dividend increases, and a bullish wave of analysts sentiment.
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