Time To Buy Caterpillar Stock?

Caterpillar (NYSE:CAT) stock has underperformed the S&P 500 index over the past six months, dropping 12% compared to the S&P 500’s 2% decline. This underperformance aligns with low dealer inventory levels, signaling subdued overall demand for Caterpillar’s products. This soft demand is likely a result of the current economic climate of elevated interest rates and high inflation, further compounded by lower price realization for the company.

Despite these headwinds, we believe Caterpillar stock is a buy. While risks exist, we consider its current valuation moderate when accounting for these factors. Our conclusion is based on a comprehensive analysis of Caterpillar’s current valuation against its recent operating performance and historical financial condition. Our assessment, which examines Growth, Profitability, Financial Stability, and Downturn Resilience, indicates that the company currently exhibits weak operating performance and financial health. However, for investors who seek lower volatility than individual stocks, the Trefis High Quality portfolio presents an alternative — having outperformed the S&P 500 and generated returns exceeding 91% since its inception. Separately, see – RGTI Stock: What’s Next After An 1,100% Rally?

Image by Dimitris Vetsikas from Pixabay

How Does Caterpillar’s Valuation Look vs. The S&P 500?

Going by what you pay per dollar of sales or profit, CAT stock looks slightly cheap compared to the broader market.

• Caterpillar has a price-to-sales (P/S) ratio of 2.6 vs. a figure of 3.0 for the S&P 500
• Additionally, the company’s price-to-free cash flow (P/FCF) ratio is 14.7 compared to 20.5 for S&P 500
• And, it has a price-to-earnings (P/E) ratio of 16.7 vs. the benchmark’s 26.4

How Have Caterpillar’s Revenues Grown Over Recent Years?

Caterpillar’s Revenues have declined marginally over recent years.

• Caterpillar has seen its top line grow at an average rate of 6.7% over the last 3 years (vs. increase of 5.5% for S&P 500)
• Its revenues have declined 5.6% from $67 Bil to $63 Bil in the last 12 months (vs. growth of 5.5% for S&P 500)
• Also, its quarterly revenues fell 9.8% to $14 Bil in the most recent quarter from $16 Bil a year ago (vs. 4.8% improvement for S&P 500)

How Profitable Is Caterpillar?

Caterpillar’s profit margins are around the median level for companies in the Trefis coverage universe.

• Caterpillar’s Operating Income over the last four quarters was $12 Bil, which represents a good Operating Margin of 19.2% (vs. 13.2% for S&P 500)
• Caterpillar’s Operating Cash Flow (OCF) over this period was $11 Bil, pointing to a moderate OCF Margin of 17.8% (vs. 14.9% for S&P 500)
• For the last four-quarter period, Caterpillar’s Net Income was $9.9 Bil — indicating a good Net Income Margin of 15.7% (vs. 11.6% for S&P 500)

Does Caterpillar Look Financially Stable?

Caterpillar’s balance sheet looks weak.

• Caterpillar’s Debt figure was $39 Bil at the end of the most recent quarter, while its market capitalization is $166 Bil (as of 6/4/2025). This implies a moderate Debt-to-Equity Ratio of 23.2% (vs. 19.9% for S&P 500). [Note: A low Debt-to-Equity Ratio is desirable]
• Cash (including cash equivalents) makes up $3.6 Bil of the $85 Bil in Total Assets for Caterpillar.  This yields a poor Cash-to-Assets Ratio of 4.2% (vs. 13.8% for S&P 500)

How Resilient Is CAT Stock During A Downturn?

CAT stock has seen an impact that was slightly worse than the benchmark S&P 500 index during some of the recent downturns. Worried about the impact of a market crash on CAT stock? Our dashboard – How Low Can Caterpillar Stock Go In A Market Crash? – has a detailed analysis of how the stock performed during and after previous market crashes.

Inflation Shock (2022)

• CAT stock fell 33.6% from a high of $244.79 on 17 May 2021 to $162.44 on 27 September 2022, vs. a peak-to-trough decline of 25.4% for the S&P 500
• The stock fully recovered to its pre-Crisis peak by 6 January 2023
• Since then, the stock has increased to a high of $416.88 on 6 November 2024 and currently trades at around $350

COVID-19 Pandemic (2020)

• CAT stock fell 39.0% from a high of $150.53 on 2 January 2020 to $91.85 on 23 March 2020, vs. a peak-to-trough decline of 33.9% for the S&P 500
• The stock fully recovered to its pre-Crisis peak by 9 September 2020

Global Financial Crisis (2008)

• CAT stock fell 74.5% from a high of $86.98 on 19 July 2007 to $22.17 on 2 March 2009, vs. a peak-to-trough decline of 56.8% for the S&P 500
• The stock fully recovered to its pre-Crisis peak by 1 December 2010

Putting All The Pieces Together: What It Means For CAT Stock

In summary, Caterpillar’s performance across the parameters detailed above are as follows:

• Growth: Neutral
• Profitability: Neutral
• Financial Stability: Weak
• Downturn Resilience: Neutral
• Overall: Neutral

Overall, Caterpillar has performed moderately across the discussed metrics, and this is reflected in its current valuation. Even when we consider valuation from an adjusted earnings perspective, the stock appears inexpensive. Currently, CAT stock trades at 17x trailing earnings, which is lower than its five-year average price-to-earnings (P/E) ratio of 19x.

We anticipate that the current slump in demand will be transient for Caterpillar. We project sales to decline in the low single-digits in 2025, but expect a return to mid-single-digit growth starting next year.

However, investors should be aware of potential risks. In the event of adverse macroeconomic conditions, CAT stock could underperform the broader market, as it has during previous market downturns. Furthermore, the overall softness in demand may persist, especially if the interest rates remain elevated.

While CAT stock looks promising, investing in a single stock can be risky. On the other hand, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-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.

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