Better Buy for 2022: Caterpillar vs. Deere

Surging demand for food products and resumption of construction activities have been leading to a rising need for heavy machinery. The global farm machinery and equipment market is expected to grow at an 8.2% CAGR and reach $276.85 billion by 2025.  Therefore, both Caterpillar Inc. (CAT) and Deere & Company (DE) should benefit.  

CAT and DE are two prominent players in the heavy machinery industry. CAT designs, manufactures, and sells construction, mining, forestry machinery, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. It also offers related equipment parts, financing, and insurance and distributes them through dealers. In comparison, DE manufactures and distributes equipment used in agriculture, construction, forestry, and turf care. It also offers wholesale financing to dealers of the equipment, extended equipment warranties, and retail revolving charge accounts.

While CAT has gained 13.5% over the past year, DE has risen 29%. Which of these stocks is a better pick now? Let us find out.

Latest Developments

On December 14, 2021, CAT’s Progress Rail company, BNSF Railway Company (BNSF), and Chevron Corporation’s (CVX) Chevron U.S.A. Inc. subsidiary announced an agreement to advance the demonstration of a locomotive powered by hydrogen fuel cells. Progress Rail plans to build a prototype hydrogen fuel cell locomotive for line-haul and/or other rail services, which is expected to be demonstrated on BNSF’s lines for a mutually agreed period. Chevron will develop the fueling concept and infrastructure to support this demonstration. The companies expect the technology to be a cost-competitive, lower-carbon alternative solution for line-haul service.

On January 5, 2022, DE announced new additions to its attachment family for excavators with the introduction of ME36 and ME50 Mulchers and the RE40 and RE50 Rotary Brush Cutters. The ME36 and ME50 mulchers are equipped with knife-style cutting teeth on a split ring rotor. This allows fast, efficient cutting for mulch up to 5-inch material and delivers an effective mulching rate. Equipped with a bolt-on mounting system, the RE cutters offer flexible configuration to a variety of coupling systems and bring more versatility. DE expects to witness high demand in the coming months.

Recent Financial Results

CAT’s total sales and revenues for its fiscal 2021 third quarter, ended September 30, 2021, increased 25.5% year-over-year to $12.40 billion. The company’s adjusted operating profit came in at $1.70 billion, up 54.9% from the prior-year period. CAT’s adjusted profit came in at $1.46 billion for the quarter, representing a 74.9% rise from its year-ago period. And its adjusted EPS increased 75% year-over-year to $2.66. The company had $9.45 billion in cash and equivalents as of September 30, 2021.

For its fiscal 2021 fourth quarter ended October 31, 2021, DE’s net sales and revenues increased 16.4% year-over-year to $11.33 billion. The company’s pre-tax income came in at $1.61 billion for the quarter, representing a 44.7% rise from the prior-year period. DE’s net income came in at $1.28 billion, up 69.5% from the year-ago period. Its EPS increased 72.4% year-over-year to $4.12. The company had $8.02 billion in cash and cash equivalents as of October 31, 2021.

Past and Expected Financial Performance

CAT’s net income and EPS increased at 10.7% and 14.1% CAGR, respectively, over the past three years. The company’s total assets increased at a CAGR of 1.1% over the past three years.

CAT’s EPS is expected to rise 58.4% year-over-year in the fiscal year 2021 ended December 31, 2021, and 19.1% in 2022. The company’s revenue is expected to increase 20.3% year-over-year in fiscal 2021 and 12.8% in 2022. Analysts expect the company’s EPS to grow at a 32.2% rate per annum over the next five years.

In comparison, DE’s net income and EPS grew at CAGRs of 36.1% and 37.9%, respectively, over the past three years. The company’s total assets have grown at a CAGR of 6.3% over the past three years.

Analysts expect DE’s EPS to increase 17% year-over-year for the fiscal year 2022, ending October 31, 2021, and 13.1% in 2022. Its revenue is expected to grow 18.4% year-over-year in fiscal 2022 and 7.5% in 2023. The company’s EPS is expected to grow at a rate of 12.4% per annum over the next five years.

Valuation

In terms of non-GAAP P/E, CAT is currently trading at 21.22x, 23.9% higher than DE’s 17.12x. In terms of non-GAAP forward PEG, DE’s 0.74x compares with CAT’s 0.82x.

Profitability

CAT’s trailing-12-month revenue is almost 1.1 times DE’s. CAT is also more profitable with a 6.8% levered free cash flow versus DE’s 2.8%.

Furthermore, CAT’s ROTC of 8.3% compares with DE’s 8%.

POWR Ratings

While CAT has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, DE has an overall C grade, equating to a Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both CAT and DE have a C grade for Value, in sync with their slightly higher-than-industry valuation ratios. CAT has a 21.05x trailing-12-month EV/EBIT, 9.1% higher than the 19.29x industry average. DE’s 19.58x trailing-12-month EV/EBIT is 1.5% higher than the industry average of 19.29x.

CAT has a B grade for Growth. The company’s levered free cash flow increased 27% over the past year. DE’s D grade for Growth is in sync with its negative levered free cash flow growth.

Of the 79 stocks in the B-rated Industrial - Machinery industry, CAT is ranked #26, while DE is ranked #52.

Beyond what we have stated above, our POWR Ratings system has also rated CAT and DE for Quality, Momentum, Stability, and Sentiment. Get all CAT ratings here. Also, click here to see the additional POWR Ratings for DE.

The Winner

Growing demand for heavy machinery should help CAT and DE grow. However, I believe relatively higher profitability makes CAT a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Industrial - Machinery industry.

CAT shares were unchanged in after-hours trading Wednesday. Year-to-date, CAT has gained 7.57%, versus a -0.83% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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