Where Is Caterpillar Stock Headed?

Caterpillar (NYSE: CAT) recently released its Q1 results, with revenue and earnings missing the street estimates. It reported revenue of $14.2 billion and adjusted earnings of $4.25 per share, compared to the consensus estimate of $14.6 billion and $4.35, respectively. Lower dealer inventory levels weighed on the company’s top-line. However, the company’s outlook is better than expected, boding well for its stock.

CAT stock, with -15% returns since the beginning of the year (as of April 29), has underperformed the S&P 500 index, down 5%. But, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

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How Did Caterpillar Fare In Q1?

Caterpillar’s first-quarter results revealed a 10% year-over-year decrease in revenue, reaching $14.2 billion. Examining performance across its segments, Construction Industries experienced the most significant decline at 19%, followed by Resource Industries with a 10% decrease, while Energy & Transportation saw a more modest 2% drop in revenue compared to the previous year. Our dashboard on Caterpillar’s revenue has more details. This decline in sales, coupled with a 390 basis point contraction in adjusted operating margin to 18.3%, resulted in earnings per share of $4.25, down from $5.60 in the same quarter last year.

A key factor weighing on Caterpillar’s sales was a significantly lower change in dealer inventory levels ($100 million compared to $1.4 billion in the prior-year quarter), indicating soft overall demand. This subdued demand can be attributed to the current environment of elevated interest rates and high inflation. Additionally, lower price realization contributed to the decline in the company’s sales. Given this soft demand, Caterpillar could face challenges in raising prices.

Looking ahead, Caterpillar expects its second-quarter sales to be similar to the prior year. However, the company anticipates an additional cost headwind of $250 million to $350 million in Q2 due to tariffs. For the full year, assuming no further impact from tariffs, Caterpillar projects sales to be roughly flat compared to 2024, an improvement from January’s outlook of a slight decline. Nevertheless, if tariffs remain at their current levels, the company still expects full-year sales to align with the initial January guidance.

What does this mean for CAT stock?

Despite a weaker-than-expected first quarter, Caterpillar’s stock experienced a 3% increase following the earnings announcement, driven by a positive outlook. It’s worth noting that CAT has demonstrated consistent growth, increasing its value in each of the past four years. Specifically, the stock delivered returns of 16% in 2021, 19% in 2022, 26% in 2023, and 25% in 2024. However, this consistent appreciation has not translated into consistent market outperformance.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has comfortably outperformed the S&P 500 over the last four-year 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.

Considering the current uncertain macroeconomic environment, particularly concerning tariffs and trade tensions, the question arises whether CAT might face a similar period of underperformance relative to the S&P 500 over the next 12 months, as it did in 2021. Alternatively, could the stock experience a significant upward movement?

While we are in the process of updating our valuation model for CAT to incorporate the latest results, our current assessment suggests that the stock has potential for growth. Trading at approximately $315, CAT’s stock currently has a price-to-earnings (P/E) ratio of 15x, based on trailing earnings of $20.55 per share. This is lower than its average P/E ratio of 19x over the past five years. Although a slight contraction in the valuation multiple appears reasonable given the recent decline in sales and profits, we believe that at a 15x earnings multiple, CAT stock may still offer some room for appreciation.

While CAT stock looks like it 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.

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