The House has finally passed the $1 trillion infrastructure bill. Stocks that benefit from higher infrastructure investments, which includes Caterpillar (CAT), are trading higher today on the news.
Meanwhile, most infra stocks including Caterpillar are trading way below their 52-week highs. What’s the forecast for CAT stock and is it a good stock to buy now after the passage of the infrastructure bill?
Caterpillar is a play on both mining and infrastructure
Here it is worth noting that while the construction sector is the biggest revenue segment for Caterpillar, it accounts for less than half of its revenues. The energy and transportation segment are the second biggest revenue driver while the resource industry is the third-largest contributor.
However, all three business segments of Caterpillar are currently witnessing an uptrend. The equipment demand from mining and oil and gas companies has also been strong amid the revival in commodity markets after years of underinvestment.
Baird is bullish on CAT stock
Baird has issued a bullish note on CAT stock calling it “underappreciated.” “Following the passage of the Infrastructure bill we are adding Fresh Pick designations on four Outperform-rated stocks (CAT, ASTE, TEX, OSK). The bill provides funding visibility supporting a multiyear equipment capex cycle see details here; all four stocks will directly benefit while 2022 margins are poised to accelerate as equipment pricing is catching up with higher input costs,” it said in its note.
Caterpillar stock forecast
Wall Street analysts have a split rating on Caterpillar stock. Of the 27 analysts polled by CNN Business, 13 rate it as a buy while 12 have a hold rating. The remaining two analysts rate CAT as a sell. Its median target price is $234, which is a premium of 9.7% over current prices. Its street high target price of $301 is a premium of 41.2% over current prices.
Meanwhile, while CAT stock is rallying along with other infra names, Jim Cramer has cautioned buyers and called it a “Captain Obvious” rally. He believes that that the infra bill was largely priced in the stocks and the steep rise on the bill passage is unwarranted. Cramer expects the rally in infra stocks to soon lose steam.
Caterpillar reported its third-quarter earnings last month. The company’s revenues increased 25% to $12.4 billion in the quarter. It reported an adjusted EPS of $2.66 in the quarter and returned $2 billion to shareholders in the form of dividends and buybacks.
Notably, buybacks in the US markets are expected to hit a new record this year. Corporate earnings have rebounded and companies are rewarding shareholders with buybacks and dividends. Even Warren Buffett has scaled up share buybacks as the Oracle of Omaha hasn’t been able to identify other opportunities to deploy the company’s massive cash pile. Berkshire Hathaway ended the third quarter with total cash of almost $150 billion, which is a record for the Buffett-led company.
Coming back to Caterpillar, its revenues in the third quarter across all segments in all geographies. While it also reflects the lower base year effect, it also points to the underlying strength in end markets.
Expressing optimism over the results, Chairman and CEO Jim Umpleby said “Our global team continues to execute our long-term strategy for profitable growth while working to mitigate supply chain challenges as we serve our customers.”
Should you buy CAT stock?
CAT is among the best infrastructure stocks to buy. Its NTM (next-12 months) PE multiple is 18.2x, which is largely in line with its long-term trading multiples. However, the company could see a valuation rerating as countries across the globe increase investments in infrastructure. Also, the demand from mining is expected to be strong after years of underinvestment.
While there are supply chain bottlenecks, which are more of an industry-wide problem, the long-term forecast for Caterpillar stock looks positive.
How to buy CAT stock?
You can invest in infrastructure stocks like CAT through any of the reputed online stockbrokers. Alternatively, if you wish to trade derivatives, we also have reviewed a list of derivative brokers you can consider.
An alternative approach to investing in infrastructure space could be to invest in ETFs that invest in infra companies like CAT
Through an infra ETF, you can diversify your risks across many companies instead of just investing in a few companies. While this may mean that you might miss out on “home runs” you would also not end up owning the worst-performing stocks in your portfolio. The iShares US Infrastructure ETF (IFRA) is a good way to play the infrastructure bill.
By investing in an ETF, one gets returns that are linked to the underlying index after accounting for the fees and other transaction costs. There is also a guide on how to trade in ETFs.