Ever driven past a construction site and wished that you could just hop in one of those bright yellow or orange bulldozers and taken it for a spin? Well if you own Caterpillar stock, you could just demand to drive one as an owner of the company. (Just kidding, please don’t run rampant on a construction site waving your brokerage account on your phone).
However Caterpillar ($CAT) seems to have such an incredible upside that investing in the company might just net you enough to buy your own bulldozer.
Incredible strength of the Caterpillar machine
In its earnings call on 7/30/18, Caterpillar had a Q2 earnings per share of $2.97, beating estimates by $0.23 a share. The stock missed by $80 million on revenue, but posted massive growth, coming in at a whopping 23.7% year over year revenue growth (don’t think the miss was a big deal either, customers spent an incredible $14.01 billion dollars with $CAT).
A few other highlights from the Q2 earnings report:
- Profits per share doubled
- Raised full year profit per share outlook
- Repurchased $750 million of share
- Increased quarterly dividend 10%
- Ended Q2 with an enterprise cash balance of $8.7 billion
Why Caterpillar is bulldozing the competition, and why you should build your portfolio with it
Despite a higher than average share price, Caterpillar has some incredible room to grow. They are one of the largest multinational companies in the construction and mining equipment, and produce a record number of diesel and natural gas engines. Let’s also not forget the turbine business.
Doing a breakdown analysis, and looking at 5 year discounted cash flow EBITDA, we are looking at a price target of $215.71, an incredible 54% upside to an already strong company. This upside, coupled with a 2.46% dividend, and an 82.9% payout ratio, means that CAT could be the foundation of a strong capital gain and diversified income portfolio.
Playing bigger moves in Caterpillar
Remaining bullish on Caterpillar, and wanting to control more stock, we look at options. At the ~$215 price target, our goal would be to look at 2020 calls. Buying 17 JAN 2020 $210 CALL at $2.35 a unit, and buying 10 contracts, you’re looking at an entry point of $2,350, but the stock reaching $200 by 2 OCT 2019 would realize you a net profit of $4,680, or a 199% gain.