Is Caterpillar Stock A Better Pick Over Its Competitor?

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We believe that industrial companies Caterpillar stock (NYSE: CAT) and Deere stock (NYSE: DE) will likely offer similar returns over the next three years. Although CAT is trading at a slightly lower valuation of 1.9x, trailing revenues vs. 2.3x for DE, this gap in the valuation is justified given Deere’s superior revenue growth and profitability, as discussed below.

If we look at stock returns, Deere, with 9% gains this year, has fared much better than the -7% return for Caterpillar stock and -14% returns for the broader S&P 500 index. There is more to the comparison, and in the sections below, we discuss the possible stock returns for CAT and DE 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 Caterpillar vs. DeereWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Deere’s Revenue Growth Over The Recent Years Has Been Better

  • Both companies posted double-digit sales growth over the last twelve months. Still, Caterpillar’s revenue growth of 17.7% is slightly higher than 14.0% for Deere.
  • However, looking at a longer time frame, Deere fares better. While Caterpillar’s sales declined at an average annual rate of 0.7% to $51.0 billion in 2021, compared to $54.7 billion in 2018, Deere saw its revenue rise at an average growth rate of 6.5% to $44.0 billion in 2021, vs. $37.4 billion in 2018.
  • Caterpillar’s revenue growth over the recent past has been driven by a recovery in construction and a better pricing environment.
  • Caterpillar is also benefiting from the rise in commodity prices. Higher commodity prices translate into higher capital spending for miners, bolstering the demand for Caterpillar’s mining equipment. In fact, the resource industries was the best performing segment for Caterpillar in the first half of this year, led by a high end-user demand for heavy construction and mining equipment.
  • Deere is seeing higher demand for construction and agriculture equipment. The company benefits from the above-average age of farming equipment in the U.S. The demand has also been buoyed by rising agricultural income and better price realization.
  • Our Caterpillar Revenue and Deere Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, Deere’s revenue is expected to grow faster than Caterpillar’s 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 8.7% for Caterpillar, compared to a 10.5% CAGR for Deere, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are 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 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. Deere Is More Profitable But Comes At Higher Risk

  • Caterpillar’s operating margin of 12.3% over the last twelve-month period is lower than 20.1% for Deere.
  • This compares with 14.6% and 17.9% figures seen in 2019, before the pandemic, respectively.
  • Caterpillar’s free cash flow margin of 10.5% is better than 7.9% for Deere.
  • Our Caterpillar Operating Income and Deere Operating Income dashboards have more details.
  • Looking at financial risk, Caterpillar fares better. Its 4.9% debt as a percentage of equity is much lower than 45.1% for Deere, while its 7.4% cash as a percentage of assets is higher than 5.8% for the latter, implying that CAT has a better debt position and more cash cushion, making it a comparatively less risky bet.

3. The Net of It All

  • We see that Deere has demonstrated better revenue growth in recent years and is more profitable. On the other hand, Caterpillar is trading at a slightly lower valuation and comes at a lower risk.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe both Caterpillar and Deere are likely to offer similar returns over the next three years.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 17% for Caterpillar over this period and a 14% expected return for Deere, implying that investors can pick either of the two for similar returns, based on Trefis Machine Learning analysis – Caterpillar vs. Deere – which also provides more details on how we arrive at these numbers.

While CAT stock and DE stock may offer similar returns, 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 at how counter-intuitive the stock valuation is for Deere vs. Amerco.

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 Sep 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
CAT Return 4% -7% 107%
DE Return 2% 9% 263%
S&P 500 Return 4% -14% 84%
Trefis Multi-Strategy Portfolio 6% -10% 254%

[1] Month-to-date and year-to-date as of 9/13/2022
[2] Cumulative total returns since the end of 2016

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