Cross-Sector Comparison: Is Caterpillar Stock A Better Pick Over J&J?

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We believe that Caterpillar stock  (NYSE: CAT) is a better pick than the pharmaceutical bellwether Johnson & Johnson stock (NYSE: JNJ), given its better prospects. Although these companies are from different sectors, we compare them because they have a similar P/EBIT ratio of 15x-17x. 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 to better compare their valuations.

Looking at stock returns, CAT stock has fared slightly better, with a 2% rise this year, compared to a 9% fall for JNJ, but both have underperformed the broader S&P500 index, up 14%. There is more to the comparison, and in the sections below, we discuss the possible returns for Caterpillar and J&J in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation in an interactive dashboard analysis of Caterpillar vs. Johnson & JohnsonWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Caterpillar’s Revenue Growth Is Better

  • Caterpillar’s revenue growth has been marginally better, with a 5.4% average annual growth rate in the last three years, compared to 5.1% for J&J.
  • Caterpillar is benefiting from the rise in commodity prices. Higher commodity prices translate into higher capital spending for miners, bolstering Caterpillar’s equipment demand. Also, a rebound in overall equipment demand since the pandemic has supported the company’s top-line expansion.
  • While J&J’s medical devices business (MedTech) faced headwinds in 2020 due to the pandemic’s impact, it rebounded in 2021. The pharmaceuticals segment saw a 14% rise in 2021 sales, and the medical devices segment sales were up 18%.
  • If we look at the last twelve-month period revenues, Caterpillar has fared better with sales growth of 17.1% vs. 1.5% for J&J.
  • A better pricing environment has driven Caterpillar’s revenue growth in recent quarters.
  • The growth for J&J’s medical devices and pharmaceuticals businesses slowed to 1% each in 2022. This can partly be attributed to lower contribution from the Covid-19 vaccine and falling sales for Remicade, which now faces biosimilar competition.
  • Our Caterpillar Revenue Comparison and Johnson & Johnson Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Caterpillar’s revenue is expected to grow faster than J&J’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 3% for J&J, compared to a 9% CAGR for Caterpillar, based on Trefis Machine Learning analysis.
  • J&J’s pharmaceuticals business will likely benefit from market share gains for its cancer drug – Darzalex – and immunology drugs, Erleada and Tremfya. The company is currently in the process of spinning off its consumer healthcare business as a separately traded company – Kenvue – which has already filed for an IPO. The company completed the acquisition of heart pump maker – Abiomed – last year, and it is expected to aid the top-line growth of its MedTech segment.
  • Caterpillar is expected to continue to benefit from a robust demand and pricing environment.
  • Note that we have different methodologies for companies negatively impacted by Covid and those 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 predict 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. J&J Is More Profitable 

  • Caterpillar’s reported operating margin slid from 14.6% in 2019 to 12.6% in 2022 due to increased input costs. In comparison, J&J’s margin saw modest growth from 24.1% to 24.6% over this period.
  • Looking at the last twelve-month period, J&J’s operating margin of 25% fares better than 13.5% for Caterpillar.
  • Our Caterpillar Operating Income Comparison and Johnson & Johnson Operating Income Comparison dashboards provide more details.
  • J&J’s free cash flow margin of 21.3% is better than 14.6% for Caterpillar.
  • Looking at financial risk, J&J fares better with its 10% debt as a percentage of equity much lower than 29% for Caterpillar, and its 13% cash as a percentage of assets higher than 8% for the latter, implying that J&J has a better debt position and more cash cushion.

3. The Net of It All

  • We see that Caterpillar has demonstrated better revenue growth. On the other hand, J&J is more profitable and has a better financial position.
  • 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, J&J fares better when compared to the historical average. Caterpillar stock trades at 2.0x trailing revenues, aligning with the last five-year average, while J&J trades at 4.4x trailing revenues vs. the last five-year average of 4.9x.
  • Our Caterpillar (CAT) Valuation Ratios Comparison and Johnson & Johnson (JNJ) Valuation Ratios Comparison have more details.
  • However, Caterpillar’s faster sales growth expected in the next three years gives it a slight edge over J&J.
  • For perspective, even if we consider the current P/S multiple of 2x, Caterpillar’s revenue of $79 billion in the next three years will result in a higher market capitalization of around $158 billion compared to the $125 billion currently, implying nearly 25% potential returns.
  • In contrast, J&J’s revenue will likely be about $105 billion in the next three years, and assuming it maintains its current P/S multiple of 4.4x, the market capitalization will be around $463 billion, vs. $420 billion currently, implying roughly 10% gains.
  • Overall, we believe investors willing to choose between these two stocks will likely be better off buying Caterpillar for the next three years.

While CAT may outperform JNJ 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 Johnson & Johnson vs. HCA.

Despite inflation rising and the Fed raising interest rates, CAT stock has risen 2% 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? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

Returns Jun 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
CAT Return 18% 2% 162%
JNJ Return 4% -9% 40%
S&P 500 Return 5% 14% 95%
Trefis Multi-Strategy Portfolio 6% 16% 267%

[1] Month-to-date and year-to-date as of 6/14/2023
[2] Cumulative total returns since the end of 2016

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