We believe that Caterpillar stock (NYSE: CAT) is a better pick than the pharmaceutical giant Eli Lilly stock (NYSE: LLY), given its better prospects. Although these companies are from different sectors, we compare them because they have similar operating incomes of $8-$9 billion. The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. Since these stocks are from different sectors, comparing P/S against one another may not be helpful. We compare their current multiples with the historical ones in the sections below.
Looking at stock returns, LLY stock has fared better, with a 19% rise in the last twelve months, compared to a 4% rise for CAT and an 8% decline for the broader S&P500 index. There is more to the comparison, and in the sections below, we discuss why we believe Caterpillar can offer higher returns than Eli Lilly in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation.
1. Eli Lilly’s Revenue Growth Is Better
- Both companies posted sales growth over the last twelve months. Still, Caterpillar’s revenue growth of 10% is much higher than 1% for Eli Lilly.
- However, if we look at a longer time frame, Eli Lilly has fared better, with its sales rising at an average annual growth rate of 8.7% to $29 billion in 2022, compared to $22.3 billion in 2019, while Caterpillar’s sales grew at an average annual rate of 5.4% to $59.4 billion in 2022, vs. $53.8 billion in 2019.
- A better pricing environment has driven Caterpillar’s revenue growth in the recent past.
- Caterpillar is also benefiting from the rise in commodity prices. Higher commodity prices translate into higher capital spending for miners, bolstering Caterpillar’s mining equipment demand. In fact, the resource industries was the best-performing segment for Caterpillar in 2022 (up 23% y-o-y), led by a high end-user demand for heavy construction and mining equipment.
- Eli Lilly’s revenue growth has been driven by continued market share gains for drugs such as Trulicity, Verzenio, Jardiance, and its Covid-19 antibodies. The company has secured U.S. FDA approval for its diabetes drug – Tirzepatide – which is expected to garner over $5 billion in peak sales.
- Eli Lilly has a robust product cycle, including Alzheimer’s treatment – Donanemab – one of the most anticipated drugs with peak sales pegged as high as $10 billion. This is one of the key reasons for investor optimism in LLY stock, along with its recently approved type 2 diabetes drug – Mounjaro – with peak sales estimated at around $15 billion.
- Our Caterpillar Revenue Comparison and Eli Lilly Revenue Comparison dashboards provide more insight into the companies’ sales.
- Looking forward, Caterpillar’s revenue is expected to grow faster than Eli Lilly’s over the next three years, based on Trefis Machine Learning analysis.
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2. Eli Lilly Is More Profitable
- Eli Lilly’s operating margin of 25% over the last twelve-month period is better than 13% for Caterpillar.
- This compares with 22% and 15% figures seen in 2019, before the pandemic, respectively.
- Eli Lilly’s free cash flow margin of 25% is also higher than 11% for Caterpillar.
- Our Eli Lilly Operating Income Comparison dashboard provides more details.
- Looking at financial risk, both are comparable. Although Eli Lilly’s 5% debt as a percentage of equity is lower than 8% for Caterpillar, the latter’s 8% cash as a percentage of assets is higher than 4% for Eli Lilly, implying that Eli Lilly has a better debt position, but Caterpillar has more cash cushion.
3. The Net of It All
- We see that Eli Lilly has demonstrated better revenue growth, is more profitable, and has a better debt position. On the other hand, Caterpillar has more cash cushion.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Caterpillar is the better choice.
- Looking at valuation, CAT fares better when compared to the historical average. Caterpillar stock trades at 2.0x trailing revenues, aligning with the last five-year average, while Eli Lilly trades at 10.2x trailing revenues vs. the last five-year average of 8.4x.
- It is known that Eli Lilly has strong potential from some of its new drugs and the ones in the pipeline. However, it has rallied quite a bit over recent years, evident from its higher-than-historical average trading multiple. Our Eli Lilly (LLY) Valuation Ratios Comparison has more details.
- Our forecast points to an expected return of 25% for Caterpillar over the next three years vs. an -8% expected return for Eli Lilly stock, based on Trefis Machine Learning analysis.
While CAT may outperform LLY 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 4% in the last twelve months. 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.
|S&P 500 Return||-1%||2%||75%|
|Trefis Multi-Strategy Portfolio||-3%||4%||227%|
 Month-to-date and year-to-date as of 3/15/2023
 Cumulative total returns since the end of 2016