Caterpillar vs Deere Stock: Which Is Best?

Caterpillar Inc. (NYSE:CAT) and Deere & Company (NYSE:DE) are the largest machinery manufacturers in the United States. Each of these companies creates and sells heavy equipment used in construction, agriculture, and other verticals. Both had great growth in 2020 and are struggling to maintain momentum in 2021.

This plateau leads to a possible buying opportunity, but which is best between Caterpillar vs Deere stock?

Industry analysts believe the market is poised for growth over the next few years. Rising commodities prices and expanded construction activity will help fuel much of this growth. Caterpillar, for example, expanded its mining equipment business years ago and has been waiting for another opportunity to grow.

Meanwhile, John Deere is a premiere name in gardening, whether at home or commercial. The continued growth of plant-based foods is a good thing for agricultural companies like Deere.

Let’s rev the engines on both these companies to determine which is the better play for the next decade.

Is Caterpillar A Good Buy?

Caterpillar pays an annual dividend of $4.12, which gives it a dividend yield of 2.08 percent in 2021. For income investors that’s not a bad start, but what else is compelling to investors about owning the stock?

The company is known for its yellow iron machinery and equipment although it’s expanding in recent years into self-driving vehicles, telematics software, and remote work equipment. Of course, Caterpillar’s idea of remote work isn’t at home – it’s in the wilderness outside of civilization.

Fourth quarter 2020 sales were $11.2 billion, a year-over-year decrease of 15 percent. Still, it paid dividends and generated $2.12 EPS from that.

As the prices of commodities like gold, nickel, and silver rise, so does the need for Caterpillar equipment. And it could be heavily involved in the push to automation for the Fourth Industrial Revolution.

Caterpillar Is Susceptible To Economic Cycles

Caterpillar struggled in the years leading up to the pandemic. The need for its equipment is cyclical, and it’s capital-intensive to make. The company tried to expand its mining operations in the early 2010s when prices were high, but they fell, along with the need for its equipment.

The business is cyclical, and it needs to continue innovating. Self-driving vehicles are a great start. Big companies like Amazon (AMZN) are building supply chains that use as close to full automation as possible. These industrial tools are the types of avenues the company needs to explore.

Of course, research and development is neither cheap nor easy. Its restructuring efforts may not be enough to stop the stock from tumbling again in the coming years.

However, the current need for commodities and their rising prices signal short-term tailwinds to lift the company’s share prices up. But will it outperform Deere?

Is Deere A Good Investment?

Deere & Company analysts still rate it a solid Buy at prices over $300 per share, though a discounted cash flow forecast analysis suggests the ceiling in DE share price is $311.

Many attribute the share price elevation to the growing need for agriculture. People are gardening at home more, thanks to the pandemic. And plant-based meat alternatives from companies like Beyond Meat (BYND) and Impossible Foods are making it even more fashionable to eat your vegetables.

Like Caterpillar, Deere is working on automation and connectivity to revolutionize its niches in agriculture and construction.

This fueled $22.8 billion in Deere’s Agriculture & Turf segment and $9.2 billion in Construction & Forestry for the 2020 fiscal year. That gave the company $4.8 billion in cash flow and satisfied investors, but there are risks of investing in even the most trusted American brands.

Deere Exposed To China-USA Trade War Sanctions

A noteworthy risk to Deere’s business is a trade war between the U.S. and China. While a new administration was thought to ease tensions, that hasn’t been the case so far. As an American manufacturer, Deere could risk missing out on China’s agricultural equipment needs.

That trade dispute may not be the end-all for the company though. Sales in other regions for agricultural commodities like soybeans grew in other regions as Chinese imports slowed. And farm receipts will tell the ultimate tale.

Like Caterpillar, Deere is spending heavily on R&D. This helps it stay ahead of industry technology trends but also increases overhead.

Unlike Caterpillar, Deere stock hasn’t been as volatile. Instead, it was mostly flat through the 2010s, only picking up pace in the past couple of years. Since the pandemic, its market cap has tripled.

It’s always hard investing at the high, and Deere stock only seems to continue defying the market, eclipsing former share price peaks.

Caterpillar Vs Deere Stock: Which Is Best?

Caterpillar and Deere are experiencing big success in their respective niches post pandemic. Commodities like mined metals and agriculture are continuing to grow in price and need. This creates an opportunity for more businesses to expand their operations with new equipment.

And they’re both focused on automation. This is the key ingredient to the fourth industrial revolution and keep them on the cutting edge of technology.

But they do have risks. Should the prices of the commodities nosedive, their share prices will surely follow. They also face potential problems from global trade wars that could affect overall exports and imports of the resources they use to produce.

In spite of these risks, analysts have a generally favorable outlook on both for the near-term future. 

From a bottom line valuation perspective, DE share price appears fully valued at $311 per share while CAT share price ceiling is $206 according to discounted cash flow analysis of both companies’ financial statements. That’s not to say both stocks can’t run further than their peak valuations but it does offer a cautious note to investors where the top may be for each.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.