Should You Buy Caterpillar Stock Over This Industrial Company?

CAT: Caterpillar logo

We think that Caterpillar stock (NYSE: CAT) currently is a better pick compared to its industry peer Terex stock (NYSE: TEX), a global manufacturer of lifting and material processing products, despite Caterpillar being the more expensive of the two with its stock trading at 2.3x trailing revenues, compared to just 0.8x for Terex.

Even if we were to look at the P/EBIT ratio, CAT stock appears to be more expensively priced with 18x P/EBIT ratio, compared to 12x for TEX stock. This gap in valuation is justified given Caterpillar’s better revenue growth and higher profitability, and this trend is likely to continue going forward as well, as we discuss in the sections below. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis Caterpillar vs Terex: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Caterpillar’s Revenue Growth Is Stronger

  • Caterpillar’s sales have jumped from $38.5 billion in 2016 to $48.4 billion over the last twelve months, while Terex’s revenues have declined from $4.4 billion to $3.7 billion over the same period, due to the impact of Covid-19 on demand for Terex’s aerial work platforms (elevating work platforms).
  • However, Terex’s revenue growth of 16% over the last twelve month period was higher than 11% growth for Caterpillar, given a rebound in materials processing equipment demand.
  • Looking at a slightly longer time frame, both the companies have seen a decline in sales. That said, Caterpillar’s last three-year revenue CAGR of -1.2% is better than -4.6% CAGR for Terex.
  • Looking forward, with economies now opening up, the demand for construction equipment is likely to remain high in the near term, boding well for revenue growth of both the companies. Our Caterpillar Revenues dashboard provides more insight on the company’s revenues.
  • Caterpillar’s revenue is expected to continue to grow at a faster pace compared to Terex. The table below summarizes our revenue expectation for CAT and TEX over the next three years, and points to a CAGR of 15% for Caterpillar, compared to a CAGR of 6% for Terex.
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2. Caterpillar Is Also More Profitable But It Is Comparatively A Riskier Bet

  • Caterpillar’s operating margin of 13% over the last twelve month period is better than 7% for Terex.
  • However, if we were to look at the recent margin growth, Terex stands slightly ahead, with last twelve month vs last three year margin change at 0.8%, compared to -0.2% for Caterpillar. That said, looking at past few years, Caterpillar has seen better operating margins compared to Terex. Our Caterpillar (CAT) Operating Income Comparison and Terex (TEX) Operating Income Comparison dashboards provide more details on the companies’ operating income and margins.
  • Looking at financial risk, Terex is more attractive with lower risk compared to Caterpillar. Its <1% debt as a percentage of equity is lower than 3% for Caterpillar, while its 18% cash as a percentage of assets is higher than the 12% for Caterpillar, implying that TEX has a better debt and cash position, and CAT stock is a comparatively more risky bet.

3. The Net of It All

  • We see that the revenue growth has been stronger for Caterpillar and it is more profitable compared to Terex. That said, TEX is a less riskier bet among the two with better debt and cash position, along with its comparatively lower valuation.
  • Looking at future prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe CAT is the better choice of the two. The table below summarizes our revenue and return expectation for CAT and TEX over the next three years, and points to an expected return of 30% for CAT over this period vs. -1% for TEX, implying that investors are better off buying CAT over TEX, in our view. Our dashboard Caterpillar vs Terex has more details on how we arrive at these numbers.
  • Note that Covid-19 is proving more difficult to contain than initially thought, due to the spread of more contagious virus variants and infections in many geographies, including the U.S. and Europe, are higher than what they were a few months back. The concerns around Omicron have spooked the markets at large. If there is another large spike in Covid-19 cases from the new variant, resulting in any disruption in economic growth, it is likely to impact sales growth of several companies, including Caterpillar and Terex.

While CAT stock may see higher levels, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Allison Transmission vs. Autonation.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Jan 2022
MTD [1]
YTD [1]
Total [2]
CAT Return 6% 6% 137%
TEX Return 2% 2% 43%
S&P 500 Return -1% -1% 110%
Trefis MS Portfolio Return -5% -5% 273%

[1] Month-to-date and year-to-date as of 1/6/2022
[2] Cumulative total returns since the end of 2016

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