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Caterpillar (CAT) or Deere (DE): Which Is the Better Stock?

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Last year, the industrial sector was one of the most adversely impacted sectors due to weak commodity prices, reduced investment in the energy sector stemming from lower oil prices , poor economic conditions in some developed and developing nations, and Brexit. However, it seems to have found its footing this year.

For the second quarter of 2017, industrial production - a measure of output at factories, mines and utilities, rose at an annual rate of 4.7%. This was driven by impressive growth in mining and utilities, and marked a substantial improvement over the first-quarter's gain of 1.4%. Industrial production rose 0.2% in July, marking the sixth consecutive monthly increase.

In the past year, the industrial products sector (one of the 16 broad Zacks sectors) has clocked a gain of 21.4%, outperforming the S&P 500's climb of 16.2%. The sector had particularly exhibited strength following the election of President Donald Trump, primarily factoring in his promised pro-growth policies. Government policies encouraging better trade relations, increase in infrastructural investments, job creation and high consumer-end demand will accelerate growth of the U.S. economy. This in turn will prove beneficial for industrial stocks.

Let's take a quick look at the industrial products sector's figures in 2017 so far. The Industrial Products sector put up 18.8% growth in earnings in the second quarter of 2017. Per latest Earnings Trends report an 8.3% growth in earnings is projected for the third quarter of 2017 and 16.6% for the fourth quarter. It is one the eight sectors that is anticipated to log positive growth in earnings in the third quarter.

We put our sectors (all 16 of them) into two groups: the top half (i.e., sectors with the best average Zacks Rank) and the bottom half (the sectors with the worst average Zacks Rank). Over the last 10 years, using a one week rebalance, the top half beat the bottom half by more than twice as much. (To learn more visit: About Zacks Sector Rank ). The industrial products sector, with a Zacks Sector Rank #3, remains in the top half.

In the sector, two heavyweights that hog the limelight are Caterpillar, Inc.CAT and Deere & CompanyDE with market capitalization of $71.7 billion and $38.2 billion, respectively. Caterpillar is the world's largest manufacturer of construction and mining equipment and also dabbles in agricultural equipment, while Deere is the one world's foremost producers of agricultural equipment as well as a leading manufacturer of construction, forestry, along with commercial and consumer equipment.

Investors keen on this sector would be inquisitive about which one has the more attractive prospects. Let's look more closely at how Caterpillar and Deere fare on some key metrics to see which stock deserves to be a part of your portfolio.

Stock Performance

Caterpillar's stock has rallied 51.2% in the past year, outperforming Deere's gain of 47.8%. Both have outpaced the Industrial Product's sector's rise of 21.4% as well as the S&P 500's 16.2%.

Valuation

The EV/EBITDA metric is usually used to compare two stocks within the same industry or sector and has an edge over other metrics such as P/E because it is not affected by the different capital structures of the two companies.

Compared with machinery industry's EV/EBITDA ratio of 14.8, Caterpillar and Deere are both cheaper propositions with respective reading of 13.2 and 13.1. Deere is cheaper in terms of valuation.

Rank and Subindustry Ranking

Caterpillar currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here. Caterpillar falls under the Zacks Manufacturing-Construction and Mining sub industry which is currently carrying a Rank of #5 (out of 265 industries we cover), being in the top 2%.

While, Deere carries a Zacks Rank #3 (Hold). It falls under the Zacks Manufacturing-Farm Equipment sub industry which is currently carrying a Rank of #179 (out of 265 industries we cover), being in the bottom 30%.

Long Term Growth Expectations

In terms of long-term earnings growth expectations, Caterpillar scores above Deere with a projection of 9.5% compared with the latter's 8.0%.

Dividend Yield

For income investors, Caterpillar has a higher dividend yield (2.5%) than Deere (1.9%). Both have better dividend yields compared with the overall sector's 1.76%. Caterpillar raised dividend in Jun 2017, after a gap of two years. Deere has maintained dividend since 2014.

Inventory Turnover Ratio

Inventory turnover ratio evaluates the efficiency of an industrial company's manufacturing process. A high inventory turnover ratio ensures that the company is able to manage its inventory effectively to generate revenues and avoid wastage.

This is one of the most important financial ratios, which is widely used by industrial companies to measure its ability to utilize inventories. In the last year, the inventory turnover ratio for Deere and Caterpillar has been 4.8% and 3.1%, respectively, lower than the sector's level of 5.3%. However, Deere has registered better inventory turnover than Caterpillar.

Return on Assets

Return on assets (ROA) is one of the key financial ratios for industrials as they rely heavily on inventory to create revenues. Although they have a comparatively low level of net profit, an above-average ROA denotes that the company in question is generating earnings by effectively managing assets.

A positive ROA indicates that the company has reported gains from assets for the period in question. Coming to Caterpillar and Deere, ROA for the trailing 12-months (TTM) is 3.4% and 3.3%, respectively, which are below the industrial sector's level of 5.5%. This round goes to Caterpillar.

Earnings History, ESP and Estimate Revisions

Caterpillar reported second-quarter adjusted earnings per share of $1.49, logging a 37% improvement year over year and also ahead of the Zacks Consensus Estimate of $1.26. The better-than-expected results were driven by the company's disciplined cost-control efforts. (Read More: Caterpillar Tops Q2 Earnings & Revenues, Raises View )

Deere'sthird-quarter fiscal 2017 (ended Jul 30, 2017) earnings surged around 27% year over year to $1.97 per share. Earnings also beat the Zacks Consensus Estimate of $1.93. (Read More: Deere Beats on Q3 Earnings, Misses Sales, Raises View )

Considering a more comprehensive earnings history, both Caterpillar and Deere delivered positive surprises in each of the prior four quarters. However, Deere stands out with an average positive earnings surprise of 51.5%, better than Caterpillar's average beat of 41.4%.

When considering Earnings ESP , there is little to choose since both Caterpillar and Deere are expected to deliver earnings beat in the next quarter. This is because both the companies have the combination of two key ingredients for a possible earnings beat - a positive Earnings ESPand a Zacks Rank #1, 2 (Buy) or 3.

You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Deere has a Zacks Rank #3 and an Earnings ESP of 1.34%.

Caterpillar has a Zacks Rank #1 and an Earnings ESP 2.87%.

For Caterpillar, the Zacks Consensus Estimate for fiscal 2017 has moved up 3% to $5.22 while the estimate for fiscal 2017 has gone up 4% to $6.69 in the past 60 days.

For Deere, the Zacks Consensus Estimate for Deere has moved up 2% to $6.47 for fiscal 2017 and for fiscal 2018, the estimate has moved up 4% to $6.69 in the past 60 days.

In Conclusion

These two stocks have grabbed the spotlight with striking performances on the back of solid earnings results and estimate revisions as well as surprise history, along with their share of pros and cons. But given the price performance, Zacks Rank, long-term growth expectations, the scales are currently tipped in Caterpillar's favor.

Some Other Stocks

Apart from Caterpillar, investors interested in the industrial products sector may also consider H&E Equipment Services, Inc. HEES and Komatsu Ltd. KMTUY , both of which carry the same Zacks Rank as Caterpillar.

H&E Equipment Services has surged 72.8% in the past year.

Komatsu stock has gained 25.7% in the past year.

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Caterpillar, Inc. (CAT): Free Stock Analysis Report

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H&E Equipment Services, Inc. (HEES): Free Stock Analysis Report

Deere & Company (DE): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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