CAT is one of a handful of stocks that have increased their value in each of the last three years, but that still wasn't enough for it to consistently beat the market. Returns for the stock were 16% in 2021, 19% in 2022, and 26% 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.
Caterpillar (CAT) is a leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. Its engines and turbines are primarily focused on power generation, oil drilling, and other industrial applications.
The company also sells financial products in the form of financing options of leases and loans and insurance, primarily to drive sales growth of its products. CAT sells its products through a worldwide network of dealers.
Below are key drivers of Caterpillar's value that present opportunities for upside or downside to the current Trefis price estimate for Caterpillar:
Caterpillar's Energy & Transportation division accounts for nearly 36% of the company's value. This division includes the design, manufacture, marketing, and sales of engines, turbines, and related parts. Although Caterpillar's market share is relatively modest, the overall market size for these products is huge. This division accounted for about 35% of Caterpillar's industrial business EBITDA in 2023.
Caterpillar continues to increase its presence in the emerging markets of China, India, and Brazil. It has been expanding into these markets for higher product sales and set up manufacturing facilities. Future economic recovery in these markets presents the company with a potential opportunity to drive high top-line growth for its shareholders.
The rising population and prosperity in developing nations are driving the demand for energy. This is likely to drive growth in demand for engines and turbines used in electric power generation units. Several developing nations such as India are increasing their spending on infrastructure and housing to support their rising urban populations. The increased infrastructure spending may drive growth in construction equipment sales.
Several countries, particularly developing ones, are witnessing large-scale migration of people from rural to urban areas, leading to increased infrastructure spending on roads, bridges, and buildings. This is likely to drive growth in demand for engines used in industrial applications.
Emerging economies will be leading sources of mining, construction, and power-related equipment demand. This presents opportunities for several manufacturers, including Caterpillar.
Eastern Europe, with extensive mineable resources, is projected to exhibit an above-average growth in mining equipment demand along with the developing areas of Asia, the Africa/Mideast region, and Latin America, with the mature markets of Western Europe and North America trailing.
Many of the developing countries are facing high inflation after a strong rebound in consumer demand in 2021, post-pandemic. Central banks often resort to raising interest rates to control inflation, a trend seen in the U.S. over the past year. The Fed raised interest rates in 2022 and continued to do so in 2023, which led to reduced spending on housing because the rate hike gets included in the mortgage interest rates. The same rate hike might cause a deterioration in overall economic activity, too. Higher interest rates, in turn, increase borrowing costs for companies, leading to an increase in the price of their products. This dampens demand, moderating the growth in market size. With those things in mind, the Fed cut rates by 50 bps in September 2024.
