Since September 2020, the S&P 500 has delivered a total return of 101%. But one standout stock has more than doubled the market - over the past five years, Caterpillar has surged 216% to $465.62 per share. Its momentum hasn’t stopped as it’s also gained 36.3% in the last six months, beating the S&P by 20.7%.
Is now the time to buy Caterpillar, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Caterpillar Not Exciting?
We’re happy investors have made money, but we're cautious about Caterpillar. Here are three reasons why CAT doesn't excite us and a stock we'd rather own.
1. Core Business Falling Behind as Demand Declines
Investors interested in Construction Machinery companies should track organic revenue in addition to reported revenue. This metric gives visibility into Caterpillar’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Caterpillar’s organic revenue averaged 1.3% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Caterpillar might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Caterpillar’s revenue to rise by 5%. Although this projection suggests its newer products and services will spur better top-line performance, it is still below the sector average.
3. Recent EPS Growth Below Our Standards
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Caterpillar’s EPS grew at a weak 2.7% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its 1.3% annualized revenue declines and tells us management adapted its cost structure in response to a challenging demand environment.
Final Judgment
Caterpillar isn’t a terrible business, but it isn’t one of our picks. With its shares outperforming the market lately, the stock trades at 23.5× forward P/E (or $465.62 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.
Stocks We Like More Than Caterpillar
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