Why Did Caterpillar Stock Rise 2X in 3 Years?

by Trefis Team
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Caterpillar (NYSE:CAT) is the world’s leading manufacturer of construction and mining equipment, diesel and natural-gas engines, industrial gas turbines and diesel-electric locomotives. Caterpillar’s stock more than doubled in value over the last couple of years thanks to a combination of improved margins, upbeat global sentiment and strong revenue growth. Moreover, increasing metal prices and energy prices have aided the demand for the company’s products. This has helped Caterpillar’s valuation increase from under $60 per share in early 2016 to around $135 now. Trefis highlights the reasons for Caterpillar’s Share Price Increase over recent years in an interactive dashboard along with out forecast for full-year 2019. You can modify any of our key drivers to gauge the impact of changes on the company. Additionally, you can see all Trefis Industrial Data here

How Has Caterpillar’s Stock Performed Compared To Major Price Indices Over Recent Years?

  • Caterpillar’s stock price has increased from $62 at the beginning of 2016 to around $135 now. This translates to a growth of roughly 120%.
  • Caterpillar has comfortably outperformed major indices such as S&P 500 and Dow Jones Industrial Average.
  • Over the same period, Dow Jones Industrial Average grew by 65% while S&P 500 could manage a growth of roughly 50%.

Why Has Caterpillar’s Stock Outperformed?

Reason #1: Caterpillar’s Operating Metrics Have Improved Considerably Since 2016

Caterpillar Has Witnessed Strong Revenue Growth Post 2016

  • After plunging 18% in 2016, Caterpillar’s revenues jumped by more than $16 billion over the next 2 years at an average annual rate of 19%.
  • Construction industry has been the largest growth driver, adding $7.5 billion to total revenues – contributing roughly 46% to the total revenue growth.
  • However, Resource segment has been the company’s fastest growing segment over the recent years, adding more than $4 billion in revenues since 2016 thanks to higher equipment demand, favorable price utilization and increased services.

Strong revenue growth, lower tax rate has boosted the company’s bottom line

  • Caterpillar’s operating profit has gone up 7x since 2016, jumping from $1.16 billion in 2016 to more than $8.2 billion in 2018
  • Moreover, the company swung from net loss of $700 million in 2016 to a net profit exceeding $7.8 billion in 2018. This growth can be primarily attributed to increased construction revenues in Asia (particularly China) and a reduction in tax rate.
  • This has helped Caterpillar’s net margin increase from -0.2% in 2016 to more than 11% in 2018

Reason #2: Caterpillar’s Stock Price Is Highly Correlated To Metal & Oil Prices

  • Metal prices have gone up 40% over the last couple of years – increasing from $56 in 2016 to more than $78 as of June 2019.
  • An increase in metal prices have led to an increase in mining activities globally, in turn boosting the demand for Caterpillar’s mining- and quarry-related products.
  • We believe that there is a positive correlation of 90% between the commodity metal prices and Caterpillar stock prices. An increase in the metal prices provides a boost to the company’s resource industries revenues, thus helping the stock price movement.
  • Additionally, energy prices have gone up by 53% over the last couple of years- increasing from $48 in 2016 to more than $73 as of June 2019.
  • Higher energy prices coupled with strong demand for power generating products has led to a higher demand for Caterpillar’s energy product and related parts.
  • We calculate a positive correlation of 80% between energy prices and Caterpillar stock prices. An increase in energy prices provides a boost to the company’s energy industries revenues, thus supporting the stock price movement

Conclusion: Despite The Strong Rally Over Recent Years, Caterpillar’s Stock Offer A Sizable Upside

  • Strong commodity market fundamentals, robust demand from the Asia-Pacific region, higher demand levels for non-residential construction activities and increased demand for heavy construction, quarry and aggregate equipment will aid Caterpillar’s growth over the foreseeable future. This should support the stock price movement in the near term
  • Moreover, the proposed infrastructure legislation in the U.S., if implemented, could further provide a boost to CAT’s margins and revenues
  • We value the company at about 13x projected FY’19 EPS – similar to its current trading multiple of 13x, but higher than the industry-average trading multiple of 11.5x.
  • Based on our forecast, Caterpillar’s adjusted EPS for fiscal 2019 is likely to be around $11.88. Using this figure with our estimated P/E ratio of 13x, this works out to a price estimate of $153 for Caterpillar’s stock, which is roughly 10% ahead of the current market price.

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