Is Caterpillar Stock A Buy At $290 After A Solid Q2 Beat?

-4.22%
Downside
349
Market
334
Trefis
CAT: Caterpillar logo
CAT
Caterpillar

Caterpillar stock (NYSE: CAT) was up 9% yesterday and 17% in a month, significantly outperforming the broader markets, with the S&P500 up 3%. The company posted upbeat Q2 results this week, and after its recent rise, we think it is now appropriately priced, as discussed below. We think investors will likely be better off waiting for a dip to enter CAT stock for better gains in the long run.

Caterpillar’s revenues were up 22% to $17.3 billion in Q2, compared to our forecast of $16.8 billion and the consensus estimate of $16.4 billion. This growth was driven by a 27% rise in energy & transportation sales, while resource industries sales were up 20% and construction industries up 19%. This can be attributed to better price realization and healthy demand trends. The dealer inventory levels also improved during the quarter.

The company’s adjusted operating margins improved by a solid 750 bps to 21.3%. Caterpillar saw a slight decline in operating margin from 14.6% in 2019, before the pandemic, to 12.6% in 2022. However, it should see this metric expand in 2023. Our Caterpillar Operating Income Comparison dashboard has more details. The Q2 earnings of $5.55 on a per share and adjusted basis were up a solid 75% from $3.18 in the prior-year quarter, and this compares with our estimate of $4.72 and the consensus estimate of $4.58. The rise in earnings can be attributed to higher sales and improved operating margins.

Relevant Articles
  1. What Should You Do With Caterpillar Stock After A Mixed Q1?
  2. What Should You Do With Caterpillar Stock Ahead of Q1?
  3. Does Caterpillar Stock Have More Room To Grow After Its 25% Gain Last Year?
  4. Following A 39% Rise This Year Is Boeing Stock A Better Pick Over Caterpillar?
  5. Should You Pick Caterpillar Stock At $240 After An Upbeat Q3?
  6. Earnings Beat In The Cards For Caterpillar Stock?

Although Caterpillar posted upbeat Q2 results, it expects a sequential decline in the second half of the year. Also, the company will have a tough comparison from Q3 onward, with the prior year quarter benefiting from strong pricing growth. Still, the company’s management stated that sales are expected to trend higher compared to the second half of 2022. The dealer inventory levels may also be lower in the second half vs. the prior-year period.  Overall, Caterpillar posted solid results, and the growth will likely continue in the near term, albeit at a slower pace. The results boded well with investors, as evident from the stock price appreciation.

Looking at the stock price, we estimate Caterpillar’s Valuation to be $285 per share, broadly aligning with the current market price of $289. At its current levels, CAT stock is already trading at 16x its expected forward earnings of $18.10 on a per share and adjusted basis for full-year 2023, aligning with its last five-year average, implying that CAT stock is appropriately priced.

While CAT stock has little room for growth, 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.

Despite inflation rising and the Fed raising interest rates, CAT stock has risen 20% 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 portfolio that aims for long-term growth? Here’s a value portfolio that’s done much better than the market since 2016.

Returns Aug 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 CAT Return 9% 20% 211%
 S&P 500 Return 0% 19% 104%
 Trefis Multi-Strategy Portfolio 0% 28% 312%

[1] Month-to-date and year-to-date as of 8/2/2023
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates