Caterpillar Remains 'Undervalued' After 75% Gain In 2017, Says JPMorgan

Caterpillar Inc. CAT investors saw a return of 75 percent in 2017 versus the S&P 500's 22-percent gain, and a Wall Street analyst is projecting the growth will continue. 

The Analyst

JPMorgan's Ann Duignan upgraded Caterpillar's stock from Neutral to Overweight with a price target boosted from $144 to $200.

The Thesis

At least three notable catalysts can push Caterpillar's stock even higher, Duignan said in the upgrade note. (See the analyst's track record here.) 

The federal tax cut contains multiple aspects that are "buried in the details" and benefit companies like Caterpillar, Duignan said. For example, the tax bill includes a 100-percent accelerated depreciation applicable to both new and used property acquired and put into place before January 2023, as opposed to a prior 50-percent bonus depreciation which was available for new equipment only. This is an "important detail" for the company, since its North American equipment sales are mostly driven by replacement demand — as opposed to fleet expansion — so many new sales come with a trade, she said. 

Although not unique to Caterpillar, the tax reform will lower the company's corporate rate, which will support higher through-cycle free cash flow, the analyst said. 

And Caterpillar's resource business is likely in the second year of what will likely prove to be a 10-year upcycle, according to JPMorgan. 

"As a result of our analysis, we believe that the stock remains undervalued, despite the significant outperformance last year," Duignan said. 

Price Action

Shares of Caterpillar were up 1.44 percent at $164.28 after Monday's market open. 

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Photo courtesy of Caterpillar.