(NYSE: CAT) disclosed its financial performance for the third quarter last week, with revenue and earnings surpassing analyst expectations, and we are of the opinion that CAT stock has ample potential for growth, as discussed below. The company reported revenue of $16.8 billion and adjusted profit of $5.52 per share, as opposed to the consensus estimates of $16.6 billion and $4.80, respectively. Here, we will delve into Caterpillar’s stock performance, major takeaways from its recent results, and valuation.
CAT stock has experienced a robust surge of 35% from the $180 level in early January 2021 to approximately $240 currently, compared to an approximately 15% increase in the S&P 500 during this nearly 3-year period. However, the growth of CAT stock has not been steady. The returns for the stock were 14% in 2021, 16% in 2022, and 0% in 2023. In comparison, the returns for the S&P 500 were 27% in 2021, -19% in 2022, and 14% in 2023 – indicating that CAT performed worse than S&P in 2021 and 2023.
Indeed, Individual stocks, including industrial giants such as UNP, HON, and UPS, as well as megacap stars like GOOG, TSLA, and MSFT, have had a difficult time in recent years – in both favorable and unfavorable market conditions. In contrast, the Trefis High Quality Portfolio consists of 30 stocks that have consistently outperformed the S&P 500 every year. Why is that the case? As a collection, the HQ Portfolio stocks have delivered superior returns with lower risk compared to the benchmark index, as evidenced by the HQ Portfolio performance metrics.
Given the prevailing uncertain macroeconomic environment with elevated oil prices and high interest rates, is it possible for CAT to encounter a similar situation in 2021 and 2023 where S&P’s performance is lackluster over the next 12 months – or will we witness a significant surge? From a valuation standpoint, CAT stock appears to have potential for growth. We estimate Caterpillar’s valuation to be $289 per share, which is 20% higher than the current level of $241. Our forecast is based on a 14x P/E multiple for CAT and projected earnings per share of $20.25 on a full-year 2023 and adjusted basis. The 14x P/E multiple aligns with the average of the past three years for Cat. The company did not provide revenue and earnings ranges for Q4 but mentioned that sales would be slightly higher compared to the same period last year.
Caterpillar’s revenue of $16.8 billion in the third quarter witnessed a year-on-year increase of 12% due to a 12% rise in sales in the construction industry segment and an 11% increase in sales in the energy and transportation segment, while revenue in the resources industry segment grew by 9%. This sales growth can mostly be attributed to price hikes. Caterpillar’s backlog decreased by 8% year over year to $28.1 billion in the third quarter. The company anticipates its pricing in the fourth quarter of this year to be better than that of the previous year, but it expects a decline in dealer inventory levels. Looking ahead, Caterpillar will likely witness a deceleration in pricing growth in the upcoming quarters, facing a challenging comparison with the substantial contribution of price hikes to top-line growth in recent quarters. Caterpillar’s adjusted operating margin of 20.8% in the third quarter increased by 430 bps year over year. The higher revenues and expansion of operating margin resulted in a substantial 40% rise in earnings, reaching $5.52 per share on an adjusted basis.
While there is potential for growth in CAT stock, it would be beneficial to examine how Caterpillar performs in comparison to its peers on various metrics. You can find other valuable peer comparisons for companies in different industries here.
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