3 Reasons Caterpillar Stock Will Explode Higher in 2018

Caterpillar stock can climb another 12% to $180, according to UBS analysts. Here's how.

Author:: Bret Kenwell
Publish date:: Jan 7, 2018 7:22 AM EST

iStock

Caterpillar's (CAT) - Get Report been an easy stock to hate over the years. Whether it was lack of commitment from U.S. companies or later, trouble overseas, Caterpillar stock has been an easy one to bet against prior to 2016.

From the start of 2011 through year-end 2015, Caterpillar stock fell 27%. However, this easy-to-bet-against stock reversed its fortunes in 2016, rallying 132% over the ensuing 24 months.

According to UBS analysts, that rally isn't over yet. Analyst Steven Fisher, who has a buy rating on Caterpillar, upped his price target to $180 from $155, reflecting about 12% upside from current levels. Shares also pay a 2% dividend yield. But let's talk catalysts.

Fisher says there are a number of reasons as to why Caterpillar is heading higher in 2018, starting with a lower U.S. corporate tax rate. While a lower tax rate would boost the bottom line, so too could a stock buyback. As their base case, UBS analysts suggest a $750 million buyback in 2018 followed by a more potent $2 billion buyback in 2019.

The analysts upped their earnings estimates for Caterpillar in 2018 and 2019, to reflect a lower tax rate and reduced share count.

Finally, Fisher is counting on an earnings multiple of ~18 times their 2019 estimates calling for earnings per share of $9.75. In fact, they are not counting multiple expansion, instead using a lower earnings multiple to reflect the "cyclical progression of multiple compression as earnings improve."

In essence, a lower tax rate, a buyback and a price-to-earnings ratio of about 18 times 2019 estimates should get Caterpillar stock to $180.

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This article is commentary by an independent contributor. At the time of publication, the author had no positions in the stocks mentioned.