Which Industrial Sector Heavyweight Looks Better: Deere or Caterpillar?

Given its better valuation, we believe Deere stock (NYSE: DE) is a better pick than its peer, Caterpillar stock (NYSE: CAT) for the next three years. CAT stock trades at 2.6x revenues, versus 1.8x for DE. We think this gap in their valuation will narrow in favor of Deere, given its superior revenue growth and profitability. There is more to the comparison, and in the sections below, we discuss why we think DE will outperform CAT in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation.

1. Returns For CAT Stock Have Been Better Than For DE

CAT stock has seen extremely strong gains of 105% from levels of $170 in early January 2021 to around $350 now, while DE stock has seen gains of 50% from levels of $255 to around $380, aligning with the rise in the broader S&P500 index over the same period.

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. Looking at Deere, it saw returns of 29% in 2021, 27% in 2022, and -5% in 2023 – indicating that DE underperformed the S&P in 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector, including BA, HON, and MMM, 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.

2. Deere’s revenue growth is better

Deere has seen its revenue rise at an average annual rate of 20.2% from $34.7 billion in 2020 to $60.2 billion in 2023. In comparison, Caterpillar’s sales have grown at an average rate of 17.2% from $41.7 billion to $67.1 billion over this period. Our Caterpillar Revenue Comparison and Deere Revenue Comparison dashboards provide more insight into the companies’ sales.

Caterpillar has benefited from a robust industrial equipment demand and price environment. All of its segments — construction industries, energy and transportation, and resource industries — have seen strong sales growth in recent years. While the growth over the recent years was driven by pricing gains and an uptick in volumes, this trend has now reversed. While the company continues to see favorable price realization, volume has been lower this year. Furthermore, after strong pricing growth in recent years, it is likely to stabilize going forward and with lower volume, the overall sales are expected to fall in the near term.

Deere has benefited from higher demand for agriculture equipment, given the above-average age of farming equipment in the U.S. The agricultural equipment demand has also been buoyed by higher farm income and better price realization. However, this trend has also reversed. While the company continues to benefit from a robust pricing environment, equipment volume has declined lately. Deere may continue to face headwinds in the near term amid a fall in farm income this year and elevated interest rates. Deere’s business is cyclical, and its sales volumes have likely entered mid-cycle levels after hitting a cyclical peak last year. The company expects a double-digit decline in sales for all of its manufacturing segments in 2024.

3. Deere Is More Profitable

Caterpillar’s operating margin has expanded from 10.9% in 2020 to 19.3% in 2023, while Deere’s operating margin grew from 12.6% to 34.2% over the same period. Looking at the last twelve-month period, Deere’s operating margin of 24.5% fares better than 20.5% for Caterpillar.

4. Caterpillar Fares Better In Terms of Financial Risk

Looking at financial risk, we believe Caterpillar has an edge over Deere. Its 22% debt as a percentage of equity is lower than 63% for Deere, while its 5% cash as a percentage of assets is marginally below 6% for the latter. This implies that Caterpillar has a better debt position, but Deere has a slightly better cash cushion.

5. The Net of It All

We see that Deere has seen better revenue growth, is more profitable, and has more cash cushion. On the other hand, Caterpillar has a better debt position. Now, looking at the prospects, we believe Deere is the better choice of the two. At its current levels, Caterpillar stock is trading at 2.6x revenues, compared to the stock’s last three-year average P/S ratio of 2.0x. In comparison, Deere stock is trading at 1.8x revenues, versus the stock’s average P/S ratio of 2.1x seen over the last three years. This implies that DE stock has some room to grow, while CAT stock looks appropriately priced, in our view.

While DE may outperform CAT in the next three years, 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 8/30/2024
[2] Cumulative total returns since the end of 2016

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