Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Shares of mining and construction equipment maker Caterpillar (NYSE:CAT) were the cat's meow in 2017, notching a 75% gain over the last 12 months. But Caterpillar's momentum may be set to continue: According to a new upgrade just out of JPMorgan, there's a multiyear upcycle ahead of us today, and Caterpillar stock is poised to benefit from it.

Here's what you need to know.

Handtruck on rails in a gold mine tunnel

If this analyst's predictions prove accurate, Caterpillar stock could be a gold mine for mining investors. Image source: Getty Images.

Upgrading Caterpillar

Shares of Caterpillar climbed from $93 to $162 over the course of 2017, but according to JPMorgan, the stock's run is not yet done, StreetInsider.com (subscription required) reports today. JPMorgan believes Caterpillar stock could easily rise from the $165 price point it enjoys today to close out 2018 at $200. This "significant upside," says JPMorgan, arises from a number of trends working in Caterpillar's favor -- and merits an upgrade to overweight.

A catalyst from Congress

One of the catalysts helping out Caterpillar today will be familiar to anyone who's opened a newspaper in the last month or so. Congress' passage of the Tax Cuts and Jobs Act, says JPMorgan, will gift Caterpillar a low tax rate that should translate into "higher through-cycle free cash flow." 

A decade of rising resource prices

At the same time -- and arguably even more significant -- JPMorgan argues that the global economy as a whole has entered into a "10-year upcycle" in commodities. Production of iron, coal, copper, and other mineable minerals is rising, and bringing prices along with it.

In the analyst's estimation, we're currently entering only year two of this upcycle, which means that Caterpillar has nine more years to benefit from it. Eventually, JP estimates that the construction industry could absorb as much as 233,000 annual unit sales of trucks, excavators, and other heavy mining equipment, matching peak sales at the top of the last upcycle in 2005. Caterpillar would be "an outsized beneficiary of the potential upcycle given its leadership position in North America," says JPMorgan.

What it means to Caterpillar investors

While the duration of the upcycle remains shrouded in mystery, so far, indications look like JPMorgan is on the right track with this prediction. 2016 marked a five-year low point for Caterpillar, with sales falling for four straight years to bottom at $38.5 billion, and free cash flow (FCF) sliding over three years to a nadir of $2.7 billion.

The rebound came in 2017. Trailing-12-month sales jumped 9% from their 2016 trough, and free cash flow grew 63%, as revealed by data from S&P Global Market Intelligence. Assuming these trends hold through the release of fourth-quarter results (due out later this month), and into this year, then 2018 will at the very least be the second year of growth in a an upcycle of some length.

Whether the distance from trough to peak will be one year or 10 remains to be seen. If the cycle does hold, though, the JPMorgan believes that Caterpillar stock is worth 18 times this year's free cash flow. So what does this mean to investors?

Right now, with most of Wall Street predicting that Caterpillar will generate $5.4 billion in FCF this year, a valuation of 18 times FCF puts Caterpillar's fair value at $97.2 billion -- not far below the stock's current $98.3 billion market cap, and implying that at the least, Caterpillar stock is not terribly overpriced today. On the other hand, if other analysts' estimates prove conservative, and Caterpillar generates more free cash flow this year than Wall Street expects, then there's a good chance Caterpillar stock will rise to JPMorgan's target price -- and JP will be proven right to recommend it.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.