Strong Revenue Trends And Better Prospects Make Caterpillar Stock A Good Pick

CAT: Caterpillar logo

Despite its comparatively higher valuation, we think Caterpillar stock (NYSE: CAT) is currently a better pick than Cummins stock (NYSE: CMI). CAT stock is trading at 2.3x trailing revenues compared to 1.1x for CMI stock. Although both the companies have seen a rise in revenue over the recent past, Caterpillar has fared better.

If we look at stock returns, Caterpillar’s 6% fall is better than the -26% change for Cummins over the last twelve months. This compares with 6% growth in the broader S&P 500 index. While both the companies are likely to see continued top-line expansion, Caterpillar is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe that CAT stock will offer better returns than CMI stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Cummins vs. CaterpillarWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Caterpillar’s Revenue Growth Has Been Stronger In The Recent Past

  • Both companies posted sales growth over the last twelve months. Still, Caterpillar’s revenue growth of 22% is marginally higher than 21% for Cummins.
  • Looking at a longer time frame, Caterpillar’s sales declined 7% to $51 billion in 2021, compared to $54.7 billion in 2018, while Cummins’ sales grew 1% to $24.0 billion in 2021, compared to $23.8  billion in 2018.
  • Caterpillar’s revenue growth over the recent past has been driven by a recovery in construction and a better pricing environment.
  • Furthermore, given the Ukraine crisis, it is likely that there will be an increased diversification of energy supplies. The recent surge in commodity prices following Russia’s invasion of Ukraine will also bode well for Caterpillar’s business.
  • Cummins, an industrial company best known for its engines and power generation products, has seen its stock weighed down due to concerns around the future of its core business. Governments worldwide are looking to ban the use of combustion engines in the next decade or so. California has pledged to make all new passenger cars and trucks zero-emission by 2035 and is looking to make all heavy-duty vehicles zero-emission by 2045, where feasible.
  • Although the timeline appears far off, businesses will likely begin the transition much earlier, posing a threat to Cummins’ core business.
  • Earlier this month, The U.S. Department of Transportation’s National Highway Traffic Safety Administration announced new fuel economy standards for the model year 2024 and above.
  • Cummins has been increasingly focusing on cleaner alternatives, and investing in hydrogen technology. While traditional renewable energy sources such as solar and wind are being used in the electricity generation and transportation markets,  hydrogen is likely to be crucial to helping decarbonize sectors, including aviation, shipping, and heavy industries such as steel and cement. Our coverage of hydrogen economy stocks has more details.
  • Cummins is in the early stage of its new power business around hydrogen technology with a <0.5% revenue contribution.
  • Our Cummins Revenue and Caterpillar Revenue dashboards provide more insight into the companies’ sales.
  • Caterpillar’s revenue is expected to grow faster than Cummins over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 12.8% for Caterpillar, compared to a just 1.6% CAGR for Cummins, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies negatively impacted by Covid and for companies not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Caterpillar Is More Profitable 

  • Caterpillar’s operating margin of 12.5% over the last twelve months is marginally higher than 11.9% for Cummins.
  • This compares with 14.6% and 11.5% figures seen in 2019, before the pandemic, respectively.
  • Caterpillar’s free cash flow margin of 14% is also better than 9% for Cummins.
  • Our Cummins Operating Income and Caterpillar Operating Income dashboards have more details.
  • Looking at financial risk, Caterpillar’s 5% debt as a percentage of equity is lower than 14% for Cummins, while its 11% cash as a percentage of assets is also lower than 16% for Cummins, implying that Caterpillar has a better debt position and Cummins has more cash cushion.

3. The Net of It All

  • We see that Cummins has demonstrated marginally better revenue growth, in the long run, it has more cash cushion and is available at a relatively lower valuation. However, Caterpillar is more profitable.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Caterpillar is currently the better choice of the two.
  • The table below summarizes our revenue and return expectation for both companies over the next three years and points to an expected return of 23% for CAT over this period vs. a 2% expected return for CMI stock, implying that investors are better off buying CAT over CMI, based on Trefis Machine Learning analysis – Cummins vs. Caterpillar – which also provides more details on how we arrive at these numbers.

While CAT stock is likely to outperform CMI in the future, 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.

Furthermore, 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 Caterpillar vs. Steven Madden.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Apr 2022
MTD [1]
YTD [1]
Total [2]
CMI Return -6% -12% 41%
CAT Return -3% 5% 134%
S&P 500 Return -3% -8% 96%
Trefis Multi-Strategy Portfolio -2% -9% 257%

[1] Month-to-date and year-to-date as of 4/13/2022
[2] Cumulative total returns since the end of 2016

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