Caterpillar Inc. CAT is currently trading at a forward 12-month P/E of 16.60X compared with the manufacturing - construction and mining industry’s 15.59X. With a Value Score of C the CAT stock may not present a compelling value proposition at these levels.

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This premium valuation raises concerns, considering CAT's revenue declines over the past three quarters. While Caterpillar had been managing to maintain profitability, the decline in earnings witnessed in the third quarter of 2024 broke its streak of improved earnings for 14 straight quarters.

CAT Stock Price Performance Beats Industry, Sector & S&P500

In the past year, the CAT stock has gained 26.5% compared with the industry’s 22.8% growth. In comparison, the Zacks Industrial Products sector and the S&P 500 have risen 11.5% and 25.9%, respectively, in the same period.

CAT’s 1-Year Price Performance

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Caterpillar has also outpaced peers Komatsu KMTUY, Terex Corporation TEX and The Manitowoc Company MTW.

Ongoing Challenges Faced By Caterpillar

Weak Volumes Trends in Construction & Resource Industries: Caterpillar had been witnessing a decline in overall volumes in four consecutive quarters, reflecting subdued consumer spending amid the inflationary scenario.  Both Construction Industries and Resource Industries have faced volume declines recently due to lower equipment sales to end users, dragging their revenues and profits. This has been somewhat offset by improved performance in the Energy & Transportation segment.

Caterpillar expects 2024 revenues to be slightly lower than its prior expectations. It had initially forecasted revenues to be “slightly lower” than the record $67 billion reported in 2023. Despite the tepid revenue expectations, the adjusted operating margin is expected to be higher than CAT’s targeted range, aided by its cost-saving and restructuring actions. 

The company maintains its revenue guidance at $42-$72 billion. According to the revenue levels, margins are expected between 10% and 22%, as shown in the chart below.

Weak Demand in China: Due to the slowdown in China's real estate industry, its construction industry has taken a hit. Caterpillar is expected to continue to see weak demand for the 10-ton and above excavator market in China, which had previously been one of its largest markets.

Prolonged Contraction in the Manufacturing Sector: The Institute for Supply Management’s manufacturing index registered 48.4% in November, marking its eighth month in the contraction territory (with a reading below 50%). 

The New Orders Index was 50.4% in November, crossing the 50% mark for the first time since March 2024. It remains to be seen whether this will be sustained as the Index has struggled to deliver consistent growth since the end of its 24-month expansion streak in May 2022.

CAT Sees Downward Earnings Estimate Revisions

Reflecting the abovementioned headwinds, earnings estimates for Caterpillar have moved down for 2024 and 2025 over the past 60 days.

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Find the latest earnings estimates and surprises on Zacks Earnings Calendar.

Key Factors That Will Drive Caterpillar’s Future Growth

Despite current market weakness, CAT’s strong market presence, diverse product portfolio and focus on innovation position it improved performances going forward. The U.S. Infrastructure Investment and Jobs Act presents significant opportunities for Caterpillar’s construction equipment. The transition to clean energy is expected to drive demand for commodities, boosting sales of Caterpillar’s mining equipment. Miners are now shifting toward autonomy to increase productivity, safety and efficiency. CAT’s focus on enhancing its autonomous fleet will provide a competitive edge. 

In Energy & Transportation, strong order rates in most applications are expected to support revenues. In the Oil & Gas sector, the increased focus on sustainability will drive the demand for CAT equipment. As technology companies establish data centers globally to support their generative AI applications, Caterpillar is witnessing robust order levels for reciprocating engines. It is planning to double its output with a multi-year capital investment.
CAT has also witnessed growth in aftermarket parts and service-related revenues, which generate high margins. It is on track to double its service revenues from $14 billion in 2016 to $28 billion in 2026.

CAT has a projected long-term EPS growth rate of 9.3%, higher than the industry’s 2%.

CAT Offers Sector-Leading Dividend Yield & Returns

The company has a five-year dividend growth rate of 6.9%. CAT's 1.57% dividend yield is higher than the sector’s yield of 1.41% and the S&P 500’s 1.22%. CAT has a payout ratio of 24.15%, higher than the industry’s 23.51%. The company has paid higher dividends to shareholders for 30 straight years and is a member of the S&P 500 Dividend Aristocrat Index.

CAT’s Return on equity — a profitability measure of how prudently the company is utilizing its shareholders’ funds — is 59.1%, higher than the sector’s average of 22.2% and the S&P 500’s 30.15%.

How to Play the Caterpillar Stock?

CAT’s long-term demand prospects remain supported by increased infrastructure spending, energy-transition trends and growth in data centers. Focus on growing service revenues should help it maintain an upbeat performance. The company is also returning value to shareholders through consistent dividend payments. 

The average price target on CAT suggests a 9% increase from its last closing price of $359.77. The highest target of $515, representing a potential gain of almost 43%. This indicates that current shareholders holding onto their shares could see significant benefits if the stock trends upward as projected.

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While Caterpillar remains an attractive investment for long-term investors, its efforts to combat the challenging landscape will be crucial. Prospective investors may need to carefully evaluate the current valuation, but for existing shareholders, retaining this Zacks Rank #3 (Hold) stock in their portfolio will be a wise decision.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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The Manitowoc Company, Inc. (MTW) : Free Stock Analysis Report

Caterpillar Inc. (CAT) : Free Stock Analysis Report

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Komatsu Ltd. (KMTUY) : Free Stock Analysis Report

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