Caterpillar CAT is poised to drive into the middle of a new financial megacycle that could send its stock price higher by at least 25 per cent, argues Cowen analyst Matt Elkott.
We are planning a megacycle of commercial and financial performance for Caterpillar starting 2021 in the next three years. Growth in revenue, operating margin, gross margin and EPS. It's fairly consistent with the consensus, but what is somewhere overlooked here is this will be the first time in 14 years that Caterpillar has grown for three consecutive years in all these metrics. This happened the last time it happened 14 years ago and the stock had one of its most positive price action, said Elkott on Yahoo Finance Live.
Elkott slapped Caterpillar with outperform rating on Thursday with a $241 price target.
Caterpillar shares rose 3% to $194.18 on the call. Shares are down 6.7% year-to-date, lagging the S&P 500's 17% gain as investors fret about inflationary impacts on industrial companies and slowing growth in China’s once red-hot property market. At a forward price-to earnings multiple of 15.8 times, Caterpillar's stock trade at a discount to the S&P 500's forward multiple of roughly 21 times.
Elkott has but Caterpillar went all in on Elkott, pointing to several key drivers of a higher valuation for the maker of gigantic dump trucks.
Elkott is bullish on Caterpillar's new technologies designed to reduce emissions, autonomous products, an eventual strength in U.S. construction markets and active infrastructure bill. The company also has an opportunity to electrify its fleet of products over time.
The recent spike in energy prices may further play into a bull thesis for Caterpillar's stock.
Commodity prices raise their input costs, but higher commodity prices are good for Caterpillar because their customers do well. Which more than offset the higher input costs. Elkott says that is a part of our thesis.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter and LinkedIn.