What A Recession Would Mean For Caterpillar Stock?

CAT: Caterpillar logo

Caterpillar stock (NYSE: CAT) has seen a fall of 9% over the last month, due to fears of recession and its impact on the company’s business, after a solid financial performance over the last few quarters, driven by surging demand for industrial equipment and a better pricing environment. For perspective, in 2021, Caterpillar saw its industrial equipment sales surge 23% to $48.2 billion. All three segments – construction, resource, and energy and transportation – saw over 20% sales growth. The company also saw its adjusted net margins expand 300 bps to 11.6%, resulting in a significant 65% rise in its adjusted EPS to $10.81, compared to $6.56 in 2020.

However, investors are now concerned about whether the momentum will hold up. The U.S. economy could be headed into a recession as the Federal Reserve looks to hike interest rates more aggressively to tame surging inflation. The central bank hiked rates by 0.75% this month after raising them by 0.5% last month. There is a possibility of another rate hike as soon as the next month. [1] Consumer confidence is also declining as surging energy, food, and housing prices eat into household budgets. The markets are already pricing in some economic pain, with the S&P500 correcting by about 24% year-to-date. CAT stock is down only 6% over this period, marking an outperformance compared to the broader markets.

We don’t think a recession will meaningfully hurt Caterpillar. While industrial companies typically see sales plummet through economic downturns, we expect Caterpillar’s business to hold up much better. The demand for industrial equipment is currently strong. One big factor that will likely aid Caterpillar’s sales is the high commodity prices, which translates into higher capital spending for miners, bolstering the demand for Caterpillar’s mining equipment. The resource industries was the best performing segment for Caterpillar in Q1, with sales growth of 30% y-o-y led by a high end-user demand for heavy construction and mining equipment. The company’s management expects strong end-user demand and price realization to aid its revenue growth in 2022. Moreover, economic indicators do not point to a profound recession this time around, with household savings rising post the pandemic and banks also remaining well-capitalized.

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We think CAT stock remains a good value at its current market price of about $195 per share, trading at about 16x forward expected earnings. This is a low multiple compared to the 19x average of the last three years. We have a $235 per share valuation, which is almost 20% ahead of the current market price. See our analysis on Caterpillar ValuationIs CAT Stock Expensive Or Cheap? for more details on Caterpillar’s valuation and how it compares with peers. For more information on Caterpillar’s business model and revenue trends, check out our dashboard on Caterpillar RevenueHow CAT Makes Money.

While CAT stock looks like a good value, 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 CSX vs. Simpson Manufacturing.

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 Jun 2022
MTD [1]
YTD [1]
Total [2]
 CAT Return -10% -6% 110%
 S&P 500 Return 0% -22% 84%
 Trefis Multi-Strategy Portfolio -12% -29% 184%

[1] Month-to-date and year-to-date as of 6/17/2022
[2] Cumulative total returns since the end of 2016

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  1. The Wall Street Journal []