What Should You Do With Caterpillar Stock Ahead of Q1?

Caterpillar (NYSE: CAT) will report its Q1 2024 results on Thursday, April 25. We expect the company’s revenues to come in at $16.4 billion with  earnings of $5.18 per share, both slightly above the consensus estimates. The company should benefit from continued price improvements and a robust demand outlook. Although we expect Caterpillar to post an upbeat Q1, we believe its stock is fully valued at its current levels of under $355. Our interactive dashboard analysis of Caterpillar’s Earnings Preview has more details on how the company’s revenues and earnings will likely trend for the quarter. So, what are some of the trends that are likely to drive Caterpillar’s results?

Firstly, let us look at its stock performance in recent years. CAT stock has seen extremely strong gains of 95% from levels of $180 in early January 2021 to around $355 now, vs. an increase of about 30% for the S&P 500 over this roughly three-year period. CAT is one of a handful of stocks that have increased their value in each of the last 3 years, but that still wasn’t enough for it to consistently beat the market. Returns for the stock were 14% in 2021, 16% in 2022, and 23% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — 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 other heavyweights in the Industrials sector, including GE, UNP, and RTX, 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.

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, we think Caterpillar is fully priced. We estimate Caterpillar’s valuation to be $315 per share, roughly 10% below its current price of $355. At its current levels, CAT stock is trading at a little over 16x its forward estimated earnings of $21.72 in 2024. The 16x figure aligns with the stock’s average P/E multiple over the last five years.

Looking at the previous quarter, Caterpillar’s revenue of $17.1 billion in Q4 was up 3% y-o-y, led by a 12% rise in energy and transportation segment sales, while resource industries sales were down 6%, and construction industries down 5%. Most of the sales growth can be attributed to pricing gains, while volume declined due to a $900 million decrease in dealer inventory levels. Caterpillar’s backlog also declined 10% to $27.5 billion in 2023 versus $30.4 billion by the end of 2022.

Coming to the latest quarter, although an improvement in overall pricing should help Caterpillar, it expects a lower dealer inventory level compared to the prior-year quarter, likely weighing on the overall sales growth. The company expects its expenses to increase in the first quarter, likely resulting in a slight decline in operating margin.

Overall, 2024 is expected to be a year of tepid growth for Caterpillar and unless the company surprises with a strong earnings beat, better margin, or guidance, we don’t expect any significant growth in its stock in the near term.

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