With Caterpillar (NYSE:CAT) shares boasting a remarkable 61% gain over the past 52 weeks, outperforming the S&P 500 by nearly threefold, one analyst believes this upward trajectory is far from over.
On Tuesday, JPMorgan’s Tami Zakaria set a price target of $435 on Caterpillar stock, positioning her as the second-most optimistic analyst on Wall Street. Jefferies’ Stephen Volkmann, with a target price of $440, currently holds the highest target for Cat.
So, what’s driving this optimism for Caterpillar, particularly in the construction sector?
Zakaria’s note, as reported by TheFly.com, acknowledges that “construction data points are mixed.” However, Caterpillar might not require stellar numbers to validate its buy rating.
Analysts anticipate a modest 5.1% sales growth for Caterpillar in the first quarter, amounting to approximately $16 billion in revenue. Similarly, earnings are projected to rise by 3.7% to $5.09 per share, meeting Wall Street’s expectations. While longer-term forecasts indicate subdued growth, with a mere 0.5% earnings increase expected this year and a 5.6% rise by 2025, Zakaria believes Caterpillar’s “resilient margins” could surpass these estimates with ease.
Indeed, Caterpillar’s operating profit margin, currently at 20.4%, exceeds its pre-pandemic margin of 15% by one-third. However, this remarkable margin may signal a cyclical peak, potentially warranting a return to historical norms. From a historical perspective, Caterpillar’s profitability typically maxes out around a 10% margin. Therefore, such a high margin could serve as a cautionary indicator rather than a reason for unbridled optimism.
While history doesn’t always repeat itself precisely, it often provides valuable insights. For Caterpillar investors, it might be prudent to consider taking profits and seeking more favorable opportunities elsewhere.
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