Caterpillar Exceeds Our Expectations for First Quarter

We raised our fair value estimate to $78 from $64 per share as we increased our revenue projections for the next two years and decreased our projected U.S. federal statutory tax rate beginning in 2018.

Machinery, Energy & Transportation increased 4.0% due to both sales volume and pricing gains. Resource Industries increased 15.3% thanks to a pickup in demand for new equipment and aftermarket parts. Management indicated mining equipment operated at higher utilization rates compared with the previous year, and expects a pickup in mining truck orders as conditions surrounding commodities are starting to appear more favorable.

We forecast single-digit growth over the next five years, and believe a pickup in orders will drive down inventory and drive up profitability. This would be a drastic improvement from the past four years, but we are still cautious on global heavy machinery. Factors that may stall Caterpillar’s turnaround include delays in infrastructure and tax reform plans in the U.S., oversupply of crude oil weighing on pricing, and worldwide political uncertainty causing a disruption to development.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.