Caterpillar Stock Is A Better Pick Over This Relatively Small Industry Peer

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Caterpillar

We believe that Caterpillar stock (NYSE: CAT) is currently a better pick than its industry peer, Terex stock (NYSE: TEX), given its better prospects. Although Caterpillar is trading at a comparatively higher valuation of 2.1x trailing revenues, compared to just 0.7x for Terex, this valuation gap is justified, given Caterpillar’s superior revenue growth, profitability, and lower financial risk, as discussed below.

Looking at stock returns, Caterpillar, with a 14% return this year, has fared better than Terex stock, down 1%. This compares with -16% returns for the broader S&P500 index over this period. There is more to the comparison, and in the sections below, we discuss why we believe CAT stock will offer better returns than TEX stock in the next three years. We compare several factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Caterpillar vs. Terex: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Caterpillar’s Revenue Growth Is Better

  • Both companies posted revenue growth over the recent quarters. Still, Caterpillar’s revenue growth of 17.0% over the last twelve months is slightly better than 13.8% for Terex.
  • However, if we look at a longer time frame, both companies have seen their sales decline. Caterpillar’s sales fell at an average annual rate of 0.7% to $51.0 billion in 2021, compared to $54.7 billion in 2018. In comparison, Terex saw its sales fall at an average rate of 2.2% to $3.9 billion in 2021, vs. $4.5 billion in 2018.
  • A better pricing environment has driven Caterpillar’s revenue growth over the recent quarters.
  • 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 for the nine months ending Sep 2022, led by a high end-user demand for heavy construction and mining equipment.
  • Terex is a global manufacturer of lifting and material processing products, and its revenue growth over the recent years was impacted by Covid-19, which weighed on demand for aerial work platforms (elevating work platforms).
  • Terex has seen a rebound in demand for aerial work platforms, materials processing equipment, concrete mixer trucks, and cranes over the last year or so, a trend expected to continue in the near term. Furthermore, Terex has also benefited from better pricing.
  • Our Caterpillar Revenue Comparison and Terex Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Caterpillar’s revenue growth over the next three years is expected to be better than Terex’s. 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 3.1% CAGR for Terex, 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 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 And Comes With Lower Financial Risk

  • Caterpillar’s operating margin of 13.1% over the last twelve-month period is better than 9.9% for Terex.
  • This compares with 14.6% and 9.7% figures seen in 2019, before the pandemic, respectively.
  • Caterpillar’s free cash flow margin of 11.4% is also better than 1.8% for Terex.
  • Our Caterpillar Operating Income Comparison and Terex Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Caterpillar fares better of the two. Its 3.4% debt as a percentage of equity is much lower than 28.2% for Terex, while its 7.8% cash as a percentage of assets aligns with Terex’s, implying that Caterpillar has a better debt position, and both of them have a similar cash cushion.

3. The Net of It All

  • We see that Caterpillar has demonstrated better revenue growth, is more profitable, and has a better debt position. On the other hand, Terex has a similar cash cushion and is trading at a comparatively lower valuation.
  • 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, despite its higher valuation.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 8% for Caterpillar over this period vs. a -6% expected return for Terex, implying that investors are better off buying CAT over TEX, based on Trefis Machine Learning analysis –Caterpillar vs. Terex – which also provides more details on how we arrive at these numbers.

While CAT may outperform TEX stock, 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 FedEx vs. Amerco.

Despite inflation rising and the Fed raising interest rates, CAT stock has risen 14% this year. But can it drop from here? See how low Caterpillar stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

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 Dec 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
CAT Return 0% 14% 154%
TEX Return -5% -1% 38%
S&P 500 Return -1% -16% 80%
Trefis Multi-Strategy Portfolio 0% -18% 231%

[1] Month-to-date and year-to-date as of 12/14/2022
[2] Cumulative total returns since the end of 2016

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