CAT

Does Caterpillar Stock Have More Room To Grow After Its 25% Gain Last Year?

Caterpillar (NYSE: CAT) recently reported its Q4 results, with revenues falling marginally short but earnings beating the street estimates. There are near-term concerns for the company with volume as well as order backlog shrinking. We believe that CAT stock is now fully valued, and investors willing to enter will likely be well off waiting for a dip for better long-term gains. The company reported revenue of $17.07 billion and an adjusted profit of $5.23 per share compared to the consensus estimates of $17.15 billion and $4.76, respectively. In this note, we discuss Caterpillar’s stock performance, key takeaways from its recent results, and valuation.

CAT stock has seen extremely strong gains of 80% from levels of $180 in early January 2021 to around $320 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. CAT is one of a handful of stocks that have increased their value in each of the last three years, but that still wasn’t enough for it to consistently beat the market. Returns for the stock were 14% in 2021, 16% in 2022, and 23% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that CAT underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks, for other heavyweights in the Industrials sector, including UNP and GE, and even for the mega-cap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CAT face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, CAT stock looks appropriately priced. We estimate Caterpillar’s valuation to be $315 per share, close to its current levels of $320. Our forecast is based on a little over 14x P/E multiple for CAT and expected earnings of $21.72 on a per-share and adjusted basis for the full year 2024. The 14x P/E multiple aligns with the average value over the last four years.

Caterpillar’s revenue of $17.1 billion in Q4 was up 3% y-o-y, led by a 12% rise in energy and transportation segment sales, while resource industries sales were down 6% and construction industries down 5%. Most of the sales growth can be attributed to pricing gains, while volume declined due to a $900 million decrease in dealer inventory levels. Caterpillar’s backlog also declined 10% to $27.5 billion in 2023 versus $30.4 billion by the end of 2022.

The company stated that it expects a slight decline in dealer inventory levels in 2024. Caterpillar will likely see its pricing growth moderating in the coming quarters, with a tough comparison amid the significant contribution to top-line growth from pricing gains in the recent quarters. Caterpillar’s adjusted operating margin of 18.9% in Q4 was up 190 bps y-o-y. Higher revenues and operating margin expansion resulted in a solid 35% rise in earnings, which stood at $5.23 on a per-share and adjusted basis. Caterpillar expects its Q1’24 sales and margin to align broadly with the prior-year quarter’s numbers.

While CAT stock looks appropriately priced, it is helpful to see how Caterpillar’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Feb 2024
MTD [1]
Since start
of 2023 [1]
2017-24
Total [2]
 CAT Return 7% 34% 247%
 S&P 500 Return 3% 30% 123%
 Trefis Reinforced Value Portfolio 2% 40% 620%

[1] Returns as of 2/9/2024
[2] Cumulative total returns since the end of 2016

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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.

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