Why Caterpillar Stock Can Outperform in 2021

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When Shakespeare wrote that “what’s past is prologue,” he wasn’t referring to

Caterpillar

stock—but the thinking behind the phrase is one bullish argument for the industrial giant, according to Baird.

Analyst Mircea (Mig) Dobre reiterated an Outperform rating on Caterpillar (ticker: CAT) on Wednesday, while raising his target for the stock price to $220 from $206. Caterpillar stock was up 1.1% to $178.50 in early trading.

Dobre says that in 2021, he expects an environment similar to 2010 and 2017—when shares rallied—as global markets improve. That should lift demand after a weak year, positioning the company to deliver healthy improvements in performance.

The Covid-19 crisis was a major headwind to Caterpillar’s business. Demand fell hard in all of its business segments, and dealers’ efforts to reduce inventories made matters worse. Yet Dobre cited several reasons to be optimistic about the year ahead.

Demand for construction equipment is already starting to improve, and U.S. infrastructure spending could potentially provide another leg up. Higher commodity prices, especially for metals, coupled with an older mining fleet should drive demand for replacement equipment in that sector as well, he said. A similar dynamic is happening in the energy sector, as oil prices have rebounded recently.

The shares are up nearly 20% in 2020. The stock has doubled from its March lows, so skeptics might question how much of the rally is left.

Dobre argues that “history shows that Caterpillar’s true outperformance potential is still ahead.” While the stock does tend to outperform when demand and earnings bottom, more gains follow in the early stages of the demand rebound as dealers restock inventories and Caterpillar comes up against easy comparisons with its prior-year results, as it did in 2010 and 2017.

Investors will at least be hoping for less of a wild ride than they got in 2020.

Write to Teresa Rivas at teresa.rivas@barrons.com