Caterpillar Stock Up 4% Today – Time to Buy CAT Stock?

The price of Caterpillar stock is surging 4% during today’s pre-market stock trading action after the United States Congress passed a $1.2 trillion bipartisan infrastructure bill on Friday marking a big win for Joe Biden’s administration.

A total of 228 lawmakers (including 13 Republican senators) voted in favor of the bill, which includes, among many other things, the renewal of crucial infrastructure within the United States territory such as roads, bridges, and other similar projects.

For a company like Caterpillar, which produces heavy-duty machinery for the construction industry, the approval of this bill means higher demand for its products in the future and investors seem to be greeting the news based on today’s pre-market activity.

Can this development push the price of Caterpillar stock higher in the following weeks? In this article, I’ll assess the price action and fundamentals of CAT stock to possibly answer that question.

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Caterpillar Stock – Technical Analysis

The price of Caterpillar stock recently broke above a falling wedge formation that emerged since June – back when the price broke below a long-dated trend line.

Expectations about Caterpillar’s ability to profit from the approval of the infrastructure bill were the engine that drove the price higher since the beginning of the year and was probably the most important variable pushing CAT stock higher since Joe Biden was sworn President of the United States.

This reversal is particularly encouraging but still not enough to justify a bullish outlook. For now, the most important signal for Caterpillar stock would come from a break above the 200-day moving average, which currently stands at $215 per share.

Today’s pre-market uptick is pushing the price near that level but not above it – at least not yet.

If the price action in the following days leads to such a break, chances are that Caterpillar (CAT) stock will fully reverse its latest downtrend on the back of Congress’s decision.

Momentum oscillators are favoring a bullish outlook as well as the MACD has just moved to positive territory while the Relative Strength Index (RSI) stands at 57.5 – a bullish signal.

Caterpillar Stock – Fundamental Analysis

Caterpillar’s sales have been recovering in the past twelve months as they stand at $45.66 billion compared to $50.76 billion the firm brought back in 2019 – before the pandemic stroked.

It is important to note that the company experienced a decline in the demand for its products during the virus crisis as construction sites across the world were shut down in response to the contingency.

Gross profit margins for the firm have been relatively steady in the past few years ranging from 24% to 27% during that period while operating margins have surged to 14% to 15% in the past couple of years.

Meanwhile, net margins have stood at around 11% lately and this allows us to have some stable past performance statistics to predict where earnings may land in the future.

Analysts estimates are pointing to sales surging above pre-pandemic levels next year to $56 billion – partially aided by the US’s infrastructure bill.

Based on that estimate, net income should land at around $6.2 billion in 2022 resulting in forecasted GAAP earnings per share of approximately $11.3. Based on that estimate, the forward P/E ratio for Caterpillar stock stands at 18x.

Meanwhile, analysts’ forecasts are expected to surge at a rate of around 20% per year in the next two years and this points to Caterpillar as being fairly valued using the price-to-earnings-to-growth ratio as guidance to reach this conclusion.

Caterpillar’s dividend yield stands at 2.2% at the moment and distributions may increase in the future once the business fully recovers.

All in all, the outlook for CAT stock is bullish based on its positive technical outlook, conservative valuation, and appealing dividend. However, investors should note that demand in Asia may wane if China experiences a slowdown in its construction activity as a result of the looming Evergrande crisis.

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