Back up the dump truck on Caterpillar’s stock (CAT), says Jefferies analyst Stephen Volkmann.
“Recent turmoil in Eastern Europe fundamentally reshapes global commodity markets, driving structurally higher pricing and after years of underinvestment capacity additions and supply diversification will be necessary in both mining and oil and gas sectors, though new projects will take time. Caterpillar has historically been a strong hedge to commodity and general inflation,” Volkmann said in a new note out on Tuesday.
Volkmann upgraded his rating on Caterpillar to Buy from Hold. The analyst sees fair value at $260 a share, up about 22% from current levels.
Added Volkman, “The company was a strong hedge in the high inflation period of the 1970s. At the last cycle peak, fully 2/3 of Caterpillar’s profits came from mining and oil and gas and related activities, versus about 40% today. Mining specifically remains well below previous peak levels, and we believe new capacity will need to be more energy efficient and more automated to continue to meet ESG goals. All in, we see earnings power of about $25/share or higher as commodity infrastructure is rebuilt.”
Shares of the heavy equipment maker surged 8% to $213 on the session. The stock was among the top 10 trending tickers on the Yahoo Finance platform.
Caterpillar’s stock is now up 3.2% in 2022, outperforming the 12% drop for the S&P 500.
To Volkmann’s point, the Russia-Ukraine war has lit a fire on prices on almost all commodities.
Wheat closed in Chicago at the highest price ever on Monday. Benchmark corn and soybean futures have each surged by 26% this year. Brent crude oil briefly hit $139 a barrel on Sunday evening.
And of course, trading in nickel was suspended today as it hit $100,000 a tonne.
“Remember, bread riots are what started the Arab Spring, bread riots are what started the French Revolution,” said Sal Gilbertie on Yahoo Finance Live.
Gilbertie is the CEO of Teucrium, the largest U.S. exchange-traded fund issuer focused solely on agriculture funds.
“It is a biblical event when you run low on wheat stocks. You won’t see a global food shortage. Unfortunately, what you’re going to see globally is that billions of people might not be able to afford to buy the food,” Gilbertie added.
Sounds like a fertile backdrop for Caterpillar.
Yahoo Finance’s Julie Hyman contributed to this story.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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