Caterpillar Inc. (CAT, Financial) is one of the world's largest companies focused on the development and commercialization of construction and mining machinery, as well as gas turbines, which are in high demand in the oil and gas industry.
Over the past 12 months, the company's share price has risen more than 70%, outperforming not only the S&P 500 (SPY, Financial) but also key competitors, including Cummins (CMI, Financial) and Johnson Controls (JCI, Financial).
A key reason for Caterpillar's popularity on Wall Street among industrial stocks is its improved financial position, active use of its share repurchase program and increased dividend payments for the past 30 years. Industrial machinery manufacturing companies, including Caterpillar, benefited from 2022 to 2023 from the Biden-Harris administration initiatives, which included the Inflation Reduction Act and the Infrastructure Investment and Jobs Act, both of which boosted sales and prices of the company's products.
On the other hand, a bearish divergence formed on the two-hour chart, which, combined with the fact the company's share price has approached a strong resistance zone, is the first signal indicating the end of the bulls' strength, as well as a potential change in trend.
Source: TradingView
As a result, we continue our coverage of Caterpillar with a market perform rating for the next 12 months.
Financial position and prospects for the development of its business
Caterpillar's revenue for the first three months of 2024 was $15.80 billion, down 7.40% quarter over quarter and, more importantly, also down from the first quarter of 2023.
Source: Author's elaboration, based on GuruFocus data.
Moreover, this financial indicator failed to beat analysts' consensus estimates in the last two quarters, which is the first factor indicating financial market participants remain optimistic about Caterpillar's business prospects despite the relatively low chances of the Federal Reserve cutting interest rates in the next two quarters, as well as the continued downward trend in U.S. construction spending over the past four months.
According to the United States Census Bureau, total construction spending in March 2024 was at a seasonally adjusted annual rate of about $2.08 trillion, down about $17.10 billion from the peak reached in December 2023.
Source: United States Census Bureau
One of the main culprits for the company's revenue decline was its Construction Industries segment. Its revenue amounted to about $6.40 billion in the first three months of 2024, down 4.80% year over year partly due to falling equipment sales to end users in the Asia-Pacific region and Europe, Africa, the Middle East and Eurasia.
Source: Author's elaboration, based on quarterly securities reports.
In the medium term, we expect continued unfavorable impacts from changes in dealer inventories caused by the relatively low growth rates of the European Union's economy, as well as ongoing military conflicts in the Middle East, which, among other things, complicate the implementation of infrastructure projects.
Also, Resource Industries, which is an equally important segment for Caterpillar's financial position, continues to demonstrate negative dynamics. It specializes in providing software for the company's machines and engines, as well as supplying equipment used by clients for heavy construction, open-pit and underground mining.
Source: Author's elaboration, based on quarterly securities reports.
So its total revenue was about $3.20 billion in the first quarter of 2024, down 6.80% year over year despite higher prices for its products. The key reason for the decline in Resource Industries segment sales was the ongoing decline in demand for its equipment used to mine and transport iron ore, copper, silver and other minerals and ores in Asia, North America and Europe.
On Aug. 1, Caterpillar is expected to publish financial results for the second quarter of 2024. Analysts forecast its revenue for the quarter to range from $15.82 billion to $17.29 billion, up slightly from the prior year.
Conversely, we expect this financial metric to reach $16.95 billion, which is about $190 million above the median of this range primarily due to higher Energy & Transportation segment revenue, driven by increased demand for its electrified powertrains as well as turbines, which are critical to the construction of facilities in the oil, gas and transportation industries.
Source: Created by author
Caterpillar's earnings per share for the first three months of 2024 reached $5.60, an increase of 7.10% year over year, mainly due to management's initiatives aimed at optimizing labor costs, as well as the increased use of its share repurchase program.
Source: Author's elaboration, based on GuruFocus data.
Analysts forecast the company's second-quarter earnings per share to be between $5.13 and $5.98. Meanwhile, we expect it to be above the median of this range and reach $5.80, mainly due to raised investment in U.S. infrastructure, as well as increased sales of reciprocating engines used for the construction of liquefied natural gas plants in Europe and South America.
Source: Author's elaboration, based on GuruFocus data.
In addition, it should be noted that due to the increase in Caterpillar's operating profit in subsequent years, as well as the use of free cash flow to repurchase its shares, the company's price-earnings ratio will decrease from 16.40 to about 14.60 by 2026.
In our assessment, the value of this multiple is slightly overvalued given the relatively low rate of increase in profit of the industrial sector, as well as the negative impact of growing geopolitical tensions in the Middle East and the trade war between the United States and China.
Source: Author's elaboration, based on analyst projections.
According to GuruFocus, the average target for Caterpillar suggests a downside of about 5.60% from its current share price of $355.
Source: GuruFocus
Conclusion
Even though Caterpillar's revenue continues to decline quarterly, the stock still trades at relatively high multiples compared to industrial behemoths such as PACCAR (PCAR, Financial), Cummins and Johnson Controls. So the company's trailing 12-month price-sales ratio was 2.67, which is not only 31% higher than the average over the past five years, but also 75% higher relative to the sector.
Source: Author's elaboration, based on GuruFocus data.
Additionally, considering the absence of any significant developments for the heavy machinery and equipment industry on the near horizon that could support the company's current positive outlook, as well as the lack of progress in reducing total debt, we continue our analytics coverage of Caterpillar with a market perform rating for the next 12 months.
