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Why Caterpillar Stock Is Likely to Keep Plowing Ahead


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These reports, excerpted and edited by Barron’s, were issued recently by investment and research firms. The reports are a sampling of analysts’ thinking; they should not be considered the views or recommendations of Barron’s. Some of the reports’ issuers have provided, or hope to provide, investment-banking or other services to the companies being analyzed.


Caterpillar

CAT-NYSE


Overweight Price $207.96 on Sept. 1


by J.P. Morgan

We believe that Caterpillar’s earning power and free cash flow over this coming cycle, supported by solid global gross-domestic-product growth, merit our Overweight rating. The company has cut fixed costs by restructuring its resource business, which should provide earnings upside as volumes recover in what we expect to be a multiyear upcycle in mining. Also, we view Caterpillar as the biggest winner of an extended U.S. construction cycle. Our December 2022 price target of $248 represents about 18 times our 2023 earnings-per-share estimate, a multiple compressing toward its long-term average around 16 times. Much has been written about the [expected] five-year infrastructure bill and the impact on construction-equipment spending (the bill includes an increase of about 35% in spending on highways over the current annual authorization of $46.4 billion). But historically, construction-equipment sales were most highly correlated with residential construction. While that may change this cycle, the fundamentals still favor a solid upcycle in which nonresidential construction spending lags behind residential by 18 to 24 months. Our analysis suggests that the equipment cycle remains in the early stages, with normal demand likely in 2022 and a peak in 2024.


AbbVie

ABBV-NYSE


Buy Price $120.78 on Aug. 31


by Mizuho Securities

The Food and Drug Administration has completed its long-awaited review of the final data from [a study of]

Pfizer’s

[ticker: PFE] Xeljanz in high-risk patients with rheumatoid arthritis. These patients had higher rates of cardiovascular side effects and malignancies than those treated with TNF inhibitors [other drugs used to stop inflammation]. The FDA concludes that AbbVie’s Rinvoq and

Eli Lilly’s

[LLY] Olumiant may have similar risks. We wait to see how the FDA handles the ongoing regulatory review of Rinvoq and [competing drugs] in atopic dermatitis and other indications, but believe investors are pricing in a worst-case scenario for Rinvoq, while missing the other attractive parts of the AbbVie story. We reiterate our Buy rating. Price target: $131.


Okta

OKTA-Nasdaq


Outperform Price $264.76 on Sept. 1


by RBC Capital Markets

Okta [which sells online identity-confirmation software to businesses] delivered a strong quarter, outperforming expectations with top-line strength flowing through to margins and free cash flow. Guidance moved higher, as Okta’s goal remains 35% revenue growth through its fiscal-2026 year and 20% FCF margins. We maintain our $300 price target.


Otter Tail

OTTR-Nasdaq


Buy Price $55.47 on Sept. 1


by Maxim Group

We are raising our EPS estimates, based on higher forecasts for Otter Tail’s plastics division, which we believe can continue to benefit from low resin supplies and high demand for polyvinyl chloride, or PVC, pipes for the housing market. Multiple petrochemical facilities in the Gulf Coast temporarily shut down during Hurricane Ida; this will support resin prices. We increase our 2021 EPS estimate to $3.68 from $3.54, versus Otter Tail’s guidance of $3.50 to $3.65. Although the shares continue to reach 52-week highs, they remain below their peak levels, reached in 2019. Trading at 19 times our 2022 EPS estimate of $2.96, the stock has a dividend yield of 2.8%. We are raising our price target to $67 from $64—22 times our $3.08 2023 EPS estimate.


GXO Logistics

GXO-NYSE


Sector Weight Price $79.06 on Aug. 23


by KeyBanc Capital Markets

We are initiating coverage of GXO with 2021, 2022, and 2023 estimates of Ebitda [earnings before interest, taxes, depreciation, and amortization] of $625 million, $730 million, and $795 million, respectively, and EPS estimates of $1.75, $2.35, and $2.70. GXO is positioned to capitalize on favorable trends in supply-chain outsourcing, particularly for e-commerce and omnichannel clients. We view its revenue as stable, given the longer-term nature of its contracts, and see potential for modest margin expansion, as technology applications and further automation are more fully implemented across the business. Lastly, GXO’s free cash generation and low balance-sheet leverage support organic and inorganic growth. That said, valuation may represent a hurdle.


Synaptics

SYNA-Nasdaq


Buy Price $188.23 on Aug. 30


by Needham

Synaptics [which makes wireless-technology products, among other things] plans to acquire

DSP Group

[DSPG] for $22 a share in a transaction expected to close by year end. The acquisition will add fast-growing ultralow-energy and Smart Voice solutions to the Synaptics portfolio, while opening room for cross-selling of legacy products (cordless, faxes/printers). Combined with synergies, we see the transaction adding about 70 cents to 80 cents of EPS (or about $1.25, after all acquisition debt is paid down). With this positive development, we are reiterating our $220 price target.

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