Caterpillar operates in various end markets, and the path to a cyclical recovery varies for each one, Tiss explained. The mining and energy market will pose challenges, and it is "hard to imagine a robust surge" in the near term. Nevertheless, the mining and energy sector as a whole has "passed the lows," and the company is well positioned to capitalize on its status as a leader in capital equipment and engines — when an upturn eventually arrives.
Meanwhile, Caterpillar's cost-cutting initiatives, headcount reductions, improved sourcing and shuttering or consolidating more than 30 factories will reduce fixed costs by nearly $2 billion, the analyst continued. Also, the company can save another $750 million from the closings of two factories in Belgium and Illinois while incentive compensation fell by more than $1 billion since peaking in 2014 at $1.3 billion.
Last, Caterpillar's new CEO Jim Umpleby is likely to focus on profitability, free cash flow, and returns as opposed to the recent CEO Doug Oberhelman who focused on penetrating new markets and gaining market share. As such, the company should now be viewed as "a whole different animal."
Finally, the analyst's $125 price target is based on a 16x multiple on his 2019 earnings per share estimate of $7.85. But the company could introduce a five-year plan in September and provide a path toward a $16 EPS over the longer term. Should the stock trade at its 13–14x peak multiple then there is upside to the stock as high as $208 to $224.
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