With 61% gains racked up over the last 52 weeks, Caterpillar (CAT 1.32%) shares have outperformed the rest of the S&P 500 by a factor of nearly three -- and one analyst thinks this run's not done.
On Tuesday, JPMorgan's Tami Zakaria set a $435 price target on Caterpillar stock, making her the second-most-optimistic analyst on Wall Street. (Jefferies' Stephen Volkmann, with a $440 target price, has the current Street-high target for Cat.) But what is it about Caterpillar, exactly, that has these analysts lining up to endorse this construction stock?
Is Caterpillar stock a buy?
It's not the economy. In fact, Zakaria writes in a note covered by TheFly.com that "construction data points are mixed." Then again, Caterpillar may not need to produce gee-whiz numbers to prove her right in rating the stock a buy.
At last report, analysts are only expecting Caterpillar to post 5.1% sales growth in for the first quarter (about $16 billion in revenue), and earnings only need to rise 3.7% (to $5.09 per share) to keep Wall Street happy. Longer-term expectations are similarly muted, with analysts forecasting only half a percent of earnings growth this year, and a 5.6% increase in 2025. With Zakaria predicting "resilient margins," it shouldn't take much sales expansion for Cat to beat those predictions.
And margins are rising. At 20.4%, Cat's operating profit margin is already a full one-third better than the 15% margin it was posting pre-pandemic. My worry is that a 20% margin is way out of line with the company's historical performance, which has tended to max out around 10% profitability. To me, this suggests that its margin is approaching (or has already reached) a cyclical peak -- and is due for a reversion to the mean.
If I'm right about this, then a strong margin for Caterpillar is actually more of a warning sign than a reason for optimism. History may not repeat itself exactly, but it does usually rhyme. It may be time for Caterpillar investors to take their profits and find a better bargain.
