What Should You Do With Caterpillar Stock After A Mixed Q1?

Caterpillar (NYSE: CAT) recently reported its Q1 results, with revenues missing but earnings comfortably above our estimates. The company reported revenue of $15.8 billion and earnings of $5.60 on a per share and adjusted basis, compared to our estimates of $16.4 billion and $5.18, respectively. The overall volume remained lower, while pricing gains continued to bolster total sales. While Caterpillar reported a mixed Q1, its stock seems to be fairly valued at its current levels of around $345. In this note, we discuss Caterpillar’s stock performance, key takeaways from its recent results, and valuation.

Firstly, let us look at Caterpillar’s stock performance in recent years. CAT stock has seen strong gains of 90% from levels of $180 in early January 2021 to around $345 now, vs. an increase of about 35% 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, CAT stock looks appropriately priced. We estimate Caterpillar’s valuation to be $334 per share, close to its current levels of $345. Our forecast is based on a little over 16x P/E multiple for CAT and expected earnings of $21.49 on a per-share and adjusted basis for the full year 2024. The 16x P/E multiple aligns with the average value over the last five years.

Caterpillar’s revenue of $15.8 billion in Q1 was down 0.4% y-o-y. Looking at segments, the Construction Industries revenue was down 5%, Resource Industries sales were down 7%, while Energy & Transportation revenue was up 7%. Caterpillar saw its adjusted operating margin expand by 110 bps to 22.2% in Q1’24. The company’s bottom line stood at $5.60, compared to $4.91 in the prior-year quarter.

The company stated that it does not expect any meaningful change in dealer inventory levels in 2024, compared to a $700 million rise in 2023. We think that Caterpillar will likely see its pricing growth moderating in the coming quarters, with a tough comparison amid the significant contribution to top-line growth from pricing gains in the recent quarters. Overall, we believe that CAT stock is fully priced at levels of $345 and investors willing to enter will likely be better off waiting for a dip to garner robust gains in the long term.

While CAT stock looks appropriately priced, 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.

[1] Returns as of 4/29/2024
[2] Cumulative total returns since the end of 2016

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