Is Caterpillar Stock A Buy?

Caterpillar Inc. (NYSE:CAT) is an American heavy-machinery manufacturer that started before the Great Depression. It almost went bankrupt itself in the 1980s. Now it’s a trusted brand and part of the Dow Jones Industrial Average (DJIA), S&P 100, and S&P 500.

The company makes its money supplying construction, mining, oil, transportation, and other industrial markets with the work equipment they need. These industries were hit hard by the pandemic, so they cut back orders.

Now there is increased speculation that inflation may rise and that has analysts puzzling over the question: is Caterpillar stock a buy?

Caterpillar share price didn’t take the hit that aeronautic companies like Boeing or Rolls Royce did. And some bullish analysts believe revenues are set to rise in the coming years.

It’s a cyclical business that is heading into a busy cycle. Much of that could already be built into the stock price though. Which way will CAT share price go next?

Caterpillar Got Its Start In An Unusual Way

Caterpillar got its start through decades of research into adding horsepower to steam tractors. The initial design was said to crawl like a caterpillar and became the tanks used in World War I. After the war, the company was reformed through a bank takeover.

It built highway construction equipment when the highways and freeways were built across the country.

From there, it expanded vertically and horizontally to serve global markets with machinery, on-road trucks, engines and gas turbines, defense products, electronics, and agricultural products. It also licenses its name to a variety of companies, like Wolverine, which creates Cat-branded footwear.

It has global manufacturing and distribution that makes it a powerful industrial player. And it has a tech-focused attitude to stay relevant through the IoT-fueled fourth industrial revolution.

This size didn’t help it grow during the worst of 2020 as the pandemic choked coal and oil production. You may buy into its brand value and products, but should you buy into its stock?

Is Caterpillar Stock A Buy?

Caterpillar had a market capitalization just under $100 billion starting 2021, corresponding to a P/E ratio over 30x.

CAT share price crashed to a 52-week low of $87.50 during the March ’20 crash before climbing to historic highs of over $180.00.

The company paid a cash dividend of $4.12 in 2020 in four quarterly payments of $1.03 – a modest yield for income-oriented investors.

Revenues for the third quarter of 2020 were $9.9 billion, which is a 23 percent year-over-year decrease from the $12.8 billion in made in 2019. This was caused by the downstream impact of industries like oil clamping down on spending following the pandemic.

Don’t cry too much for it though – Caterpillar is a financial butterfly.

It pulled $4.3 billion in operating cash flow for the first 9 months of the year. Cash reserves held at $9.3 billion, and it held over $14 billion in available liquidity. Sales in 2020 may lag those in 2019, but it will still post impressive sales if the economy recovers.

Of course, there are risks, even to a century-old manufacturing giant.

Caterpillar Is Tethered To Economic Cycles

The biggest problem Caterpillar faces is a slower return to economic recovery. If government stimulus fails to keep the economy running at its propped up rates, heavy-duty commercial construction could be halted.

Existing office buildings and storefronts already got emptied by the pandemic through virtual work and municipal shutdowns. It could be two more years before construction returns to normal as existing inventory is filled.

Still, many believe it’s inevitable to return to normal. We’ll need metal ore and oil, even if the economy is slow to recover. Demand for the raw commodities isn’t going away. In fact, commodities prices are on the rise, and that could bode well for Caterpillar investors.

As prices return to normal, demand for resources increases too. It may take a few years, but the economy generally does recover. Caterpillar has exposure across enough industries that it could open new revenue streams even if the industry it serves is dead.

It does trade fairly compared to its competition. In fact, let’s review rival John Deere’s financials.

Caterpillar Vs Deere: Battle Of The Titans

Caterpillar’s biggest competitor is Deere & Company (NYSE:DE). This nearly $85 billion company also grew its market cap during the pandemic. John Deere is more commonly associated with agricultural products, but it pushed its way into construction.

Both companies are trading around a 30x P/E ratio.

Sales are cyclical, but we’re heading into a busy season. Traditionally, the companies did well after a market crash. And both have cash on hand to buy investor confidence should sales bottom out. Either can be a great dividend play for the next decade.

As the economy recovers, Caterpillar sales seem to be at rock bottom with nowhere to go but up. Construction is up in the air, but if capital spending increases in oil and mining, Caterpillar is the likely recipient.

Is Caterpillar Stock A Buy? The Bottom Line

Caterpillar is an American manufacturer and distributor of heavy machines. It serves the construction, mining, and oil markets with heavy duty equipment and saw revenues drop in 2020. Global lockdowns caused a drop in demand of raw commodities and halted production.

It’s likely the company reached its bottom already though. Sales are bound to increase as oil, mining, and construction companies start spending more capital.

Of course, that could take a long time. None of these industries gave much guidance for recovery earlier than 2022, but we do have other sectors to examine. The airline industry, for example, lowered orders from their suppliers through 2025.

Caterpillar could be a better pick for dividend investors than growth stock aficionados.

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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.