Caterpillar or Deere: Which Heavy-Equipment Manufacturer Is A Better Bet?

Caterpillar (NYSE:CAT) and Deere (NYSE:DE) are two of the largest heavy-equipment manufacturers in the world. Although the two companies make heavy equipment, their primary product offering is quite different. Caterpillar is essentially a construction equipment company that dabbles in farm equipment while Deere is a farm equipment company that also makes lawn and construction equipment. Despite their different focus, the revenue sources for both companies are nearly identical.

Trefis compares key operating metrics for Deere vs Caterpillar in an interactive dashboard, and concludes that Caterpillar’s business is larger and more profitable – with the company faring better on most counts. The dashboard captures historical performance trends for Caterpillar and Deere over recent years along with our forecast for 2019. Additionally, you can find more Trefis Textiles, Apparel and Luxury Good Industry Data here.

Caterpillar’s Revenues Exceed Deere’s Revenues By ~50%, But Deere Has Grown At A Faster Pace Over Recent Years

• Caterpillar is notably bigger than Deere. Caterpillar’s total revenues in 2018 stood at $55 billion – almost 50% more than Deere’s $37 billion.
• However, Caterpillar has added roughly $7.7 billion to total revenue since 2015 at an average annual rate of 5.2%. On the other hand, Deere has been able to add roughly $8.5 billion to total revenues, growing at an average annual rate of 9%.
• Strong commodity market fundamentals, robust demand from the Asia-Pacific region, higher demand levels for non-residential construction activities and increased demand for heavy construction, quarry and aggregate equipment have helped Caterpillar achieve strong revenue growth while higher shipment volumes and better price realization across segments have contributed to Deere’s growth

Deere’s average revenue growth of 2.5% since 2015 is marginally better than Caterpillar’s figure of 1.5%

• Both companies have been able to achieve robust growth since posting a decline in revenues for 2016. Since 2016, Caterpillar has added $16.1 billion – almost 50% more than Deere’s revenue addition of $10.7 billion.
• Upbeat metal and energy prices coupled with strong demand for power generating products has led to a higher demand for Caterpillar’s products.
• On the other hand, Deere’s Construction segment (which swelled with the acquisition of Wirtgen in 2017) has been the largest contributor to its revenues. Moreover, supportive corn prices have boosted the demand for company’s agricultural equipment.

Caterpillar’s Operating Margin Has Shown Considerable Improvement Over The Last Couple Of Years

• Deere had reported an overall higher operating margin than Caterpillar. However, strong revenue growth coupled with expansion in the gross margin have helped Caterpillar’s margin swell over the last couple of years.
• As of 2018, Caterpillar’s operating margin stood at 14.3% as opposed to Deere’s 12%

Comparing the two largest revenue driver: CAT’s Construction Industries and Deere’s Agriculture and Turf Equipment

• Deere’s Agriculture Segment consistently contributes a majority of its revenues, with an average revenue share of more than 65% in the last 3 years. The segment has added $3.4 billion to total revenue since 2016 at an average annual rate of 5.4%.
• On the other hand, Caterpillar’s revenue composition in more balanced with Construction segment accounting for 40% of total revenue and the Energy segment contributing 35%.
• Moreover, since 2015, CAT’s largest division has grown at a faster pace than Deere’s – adding more than $5 billion to total revenue at an average annual rate of 9%
• However, Caterpillar’s Construction and Deere’s Agriculture segments have similar profitability-with both operating at EBITDA margins of roughly 17%

How does Caterpillar fare against Deere in terms of key metrics like Return on Assets (RoA), Asset Turnover Ratio, Inventory Turnover Ratio and P/E Ratio? Trefis details trends in these metrics in the interactive dashboard.

Conclusion: Caterpillar Is Larger And More Profitable

• Caterpillar is clearly the bigger of the two companies and enjoys a much higher profitability than Deere.
• Moreover, Caterpillar is better utilizing its resources as evident from its higher return on assets and asset turnover ratios.
• Hence, it is no surprise that the market values Caterpillar higher than Deere. As of September 2019, Caterpillar’s market valuation stood at more than $70 billion – almost 40% more than that of Deere’s $52 billion.
• Trefis estimates that the fair value for Caterpillar is $90 billion, while that for Deere is $55 billion.
• Both the company target different markets and have strong fundamentals. Given their market outreach and strong operating metrics, we expect both Caterpillar and Deere to achieve steady growth in the coming years.

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