Caterpillar (NYSE: CAT) reported its Q3 results last week, with revenues and earnings beating the street estimates, and we believe that CAT stock has ample room for growth, as discussed below. The company reported revenue of $16.8 billion and an adjusted profit of $5.52 per share compared to the consensus estimates of $16.6 billion and $4.80, respectively. In this note, we discuss Caterpillar’s stock performance, key takeaways from its recent results, and valuation.
CAT stock has shown strong gains of 35% from levels of $180 in early January 2021 to around $240 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. However, the increase in CAT stock has been far from consistent. Returns for the stock were 14% in 2021, 16% in 2022, and 0% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 14% in 2023 (YTD) – indicating that CAT underperformed the S&P in 2021 and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector, including UNP, HON, and UPS, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
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Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CAT face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, CAT stock looks like it has room for growth. We estimate Caterpillar’s Valuation to be $289 per share, reflecting a 20% upside from its current levels of $241. Our forecast is based on a 14x P/E multiple for CAT and expected earnings of $20.25 on a per-share and adjusted basis for the full year 2023. The 14x P/E multiple aligns with the last three-year average for CAT. The company didn’t provide a revenue and earnings range for Q4 but stated that the sales would be slightly higher y-o-y.
Caterpillar’s revenue of $16.8 billion in Q3 was up 12% y-o-y, led by a 12% rise in construction industries segment sales and an 11% jump in energy and transportation sales, while the resource industries segment revenue was up 9%. Most of the sales growth can be attributed to pricing gains. Caterpillar’s backlog declined 8% y-o-y to $28.1 billion in Q3. The company stated that it will have better pricing in Q4 of this year versus the prior year, but dealer inventory levels are expected to decline. Looking forward, Caterpillar will likely see its pricing growth moderating in the coming quarters, with a tough comparison amid the significant contribution to top-line growth from pricing gains in the recent quarters. Caterpillar’s adjusted operating margin of 20.8% in Q3 was up 430 bps y-o-y. Higher revenues and operating margin expansion resulted in a solid 40% rise in earnings, which stood at $5.52 on a per-share and adjusted basis.
While CAT stock has 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.
|S&P 500 Return||5%||15%||96%|
|Trefis Reinforced Value Portfolio||5%||23%||531%|
 Month-to-date and year-to-date as of 11/6/2023
 Cumulative total returns since the end of 2016