Caterpillar (CAT) Last Update 11/29/24
Related: BA LMT GLW GE
% of Stock Price
Revenue
Gross Profits
Free Cash Flow
Caterpillar
$375.18
Yours
Trefis Price
N/A
$380
Market
 
Top Drivers for Period
Key Drivers
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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

Caterpillar Company

VALUATION HIGHLIGHTS

  1. Construction Industries constitute 43% of the Trefis price estimate for Caterpillar's stock.
  2. Energy & Transportation constitutes 36% of the Trefis price estimate for Caterpillar's stock.
  3. Resource Industries constitute 21% of the Trefis price estimate for Caterpillar's stock.

WHAT HAS CHANGED?

  1. CAT Stock Performance

CAT stock has seen extremely strong gains of over 140% from levels of $170 in early January 2021 to around $405 in late-November 2024, vs. an increase of about 60% for the S&P 500 over this 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 16% in 2021, 19% in 2022, and 26% 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.

  1. Q3 2024 Performance
Caterpillar reported sales of $16.1 billion, reflecting a 4% y-o-y decline. This can be attributed to lower volumes, partly offset by a slightly better price realization. Looking at segments, the Construction Industries revenue was down 9%, Resource Industries sales were down 10%, while Energy & Transportation revenue was up 5%. Caterpillar saw its adjusted operating margin contracted by 80 bps to 20% in Q3'24. The company's bottom line stood at $5.17, compared to $5.52 in the prior-year quarter.

BUSINESS SUMMARY

Caterpillar (CAT) is a leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. Its engines and turbines are primarily focused on power generation, oil drilling, and other industrial applications.

The company also sells financial products in the form of financing options of leases and loans and insurance, primarily to drive sales growth of its products. CAT sells its products through a worldwide network of dealers.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Caterpillar's value that present opportunities for upside or downside to the current Trefis price estimate for Caterpillar:


  • Caterpillar's Construction Industry Revenues: Caterpillar's construction industry revenues stood at $22.5 billion in 2019 as a result of improved end-user demand. However, the Covid-19 pandemic resulted in lower demand for the company's products, and the segment revenues plunged 25% to $16.9 billion. 2021 marked a rebound in demand and the segment sales surged 20% to $20.3 billion. It stood at $25.4 billion in 2023. We forecast the figure to reach about $31 billion by 2031. However, in case Caterpillar's revenues grow at a faster rate and reach $45 billion instead, there could be a 20% upside to Caterpillar's current price estimate.

  • Caterpillar's Resource Industries Revenues: Caterpillar's resource industry revenues were $12.6 billion in 2023. We currently forecast the figure to gradually rise to over $17 billion by the end of our forecast period, driven by improvements in commodity prices, long-term fundamentals of increasing population, urbanization, and energy consumption. If however, the company's resource industry revenues fail to recover in the long run and hover under the $10 billion mark, there could be a potential downside of around 10% to the price estimate.

SOURCES OF VALUE

Energy & Transportation division

Caterpillar's Energy & Transportation division accounts for nearly 36% of the company's value. This division includes the design, manufacture, marketing, and sales of engines, turbines, and related parts. Although Caterpillar's market share is relatively modest, the overall market size for these products is huge. This division accounted for about 35% of Caterpillar's industrial business EBITDA in 2023.

Increasing presence in emerging economies

Caterpillar continues to increase its presence in the emerging markets of China, India, and Brazil. It has been expanding into these markets for higher product sales and set up manufacturing facilities. Future economic recovery in these markets presents the company with a potential opportunity to drive high top-line growth for its shareholders.

KEY TRENDS

Rising population and prosperity driving demand for energy, resources, and infrastructure

The rising population and prosperity in developing nations are driving the demand for energy. This is likely to drive growth in demand for engines and turbines used in electric power generation units. Several developing nations such as India are increasing their spending on infrastructure and housing to support their rising urban populations. The increased infrastructure spending may drive growth in construction equipment sales.

People migration from rural to urban areas increasing

Several countries, particularly developing ones, are witnessing large-scale migration of people from rural to urban areas, leading to increased infrastructure spending on roads, bridges, and buildings. This is likely to drive growth in demand for engines used in industrial applications.

Emerging economies outside of China and Brazil are large potential markets

Emerging economies will be leading sources of mining, construction, and power-related equipment demand. This presents opportunities for several manufacturers, including Caterpillar.

Other developing areas to exhibit above-average growth

Eastern Europe, with extensive mineable resources, is projected to exhibit an above-average growth in mining equipment demand along with the developing areas of Asia, the Africa/Mideast region, and Latin America, with the mature markets of Western Europe and North America trailing.

Rise in interest rates may moderate the growth of market size

Many of the developing countries are facing high inflation after a strong rebound in consumer demand in 2021, post-pandemic. Central banks often resort to raising interest rates to control inflation, a trend seen in the U.S. over the past year. The Fed raised interest rates in 2022 and continued to do so in 2023, which led to reduced spending on housing because the rate hike gets included in the mortgage interest rates. The same rate hike might cause a deterioration in overall economic activity, too. Higher interest rates, in turn, increase borrowing costs for companies, leading to an increase in the price of their products. This dampens demand, moderating the growth in market size. With those things in mind, the Fed cut rates by 50 bps in September 2024.