Caterpillar (NYSE:CAT) stock has lagged behind the S&P 500 index over the previous six months, falling by 12% in contrast to the S&P 500’s 2% drop. This underachievement corresponds with low dealer inventory levels, which signal weak overall demand for Caterpillar’s offerings. This subdued demand is likely attributed to the present economic environment marked by high interest rates and elevated inflation, combined with reduced price realization for the company.
In spite of these challenges, we believe it is advisable to buy Caterpillar stock. While there are risks involved, we find its current valuation to be reasonable when considering these factors. Our assessment is grounded in a thorough analysis of Caterpillar’s existing valuation relative to its recent operational performance and historical financial state. Our evaluation, which looks into Growth, Profitability, Financial Stability, and Downturn Resilience, suggests that the company currently displays poor operational performance and financial well-being. However, for investors seeking lower volatility than individual stocks, the Trefis High Quality portfolio offers an alternative — having outperformed the S&P 500 and yielded returns exceeding 91% since its initiation. Additionally, refer to – RGTI Stock: What’s Next After An 1,100% Rally?
How Does Caterpillar’s Valuation Compare to The S&P 500?
When evaluating what you pay per dollar of sales or profit, CAT stock appears slightly undervalued in relation to the broader market.
- Caterpillar possesses a price-to-sales (P/S) ratio of 2.6 compared to a figure of 3.0 for the S&P 500
- Moreover, the company’s price-to-free cash flow (P/FCF) ratio is 14.7 against 20.5 for S&P 500
- Additionally, it has a price-to-earnings (P/E) ratio of 16.7 compared to the benchmark’s 26.4
How Have Caterpillar’s Revenues Changed Over Recent Years?
Caterpillar’s Revenues have seen a slight decrease over recent years.
- Caterpillar has experienced its top line grow at an average rate of 6.7% over the last 3 years (in comparison to an increase of 5.5% for S&P 500)
- Its revenues have dropped 5.6% from $67 Bil to $63 Bil in the past 12 months (in contrast to growth of 5.5% for S&P 500)
- Moreover, its quarterly revenues declined 9.8% to $14 Bil in the latest quarter from $16 Bil the previous year (versus a 4.8% improvement for S&P 500)
How Profitable Is Caterpillar?
Caterpillar’s profit margins are approximately at the median level for firms in the Trefis coverage universe.
Is Caterpillar Financially Stable?
Caterpillar’s balance sheet appears weak.
- Caterpillar’s Debt amounted to $39 Bil at the end of the most recent quarter, while its market capitalization stands at $166 Bil (as of 6/4/2025). This represents a moderate Debt-to-Equity Ratio of 23.2%(compared to 19.9% for S&P 500). [Note: A low Debt-to-Equity Ratio is seen as favorable]
- The cash (including cash equivalents) accounts for $3.6 Bil of the $85 Bil in Total Assets of Caterpillar. This results in a poor Cash-to-Assets Ratio of 4.2% (relative to 13.8% for S&P 500)
How Resilient Is CAT Stock In A Downturn?
CAT stock has experienced an impact that was somewhat worse than the benchmark S&P 500 index during certain recent downturns. Concerned about the effects of a market crash on CAT stock? Our dashboard – How Low Can Caterpillar Stock Go In A Market Crash? – provides an in-depth analysis of how the stock performed during and after previous market crashes.
Inflation Shock (2022)
- CAT stock decreased 33.6% from a peak of $244.79 on 17 May 2021 to $162.44 on 27 September 2022, compared to a peak-to-trough decline of 25.4% for the S&P 500
- The stock fully regained its pre-Crisis peak by 6 January 2023
- Since then, the stock has risen to a high of $416.88 on 6 November 2024 and currently trades at around $350
COVID-19 Pandemic (2020)
- CAT stock dropped 39.0% from a peak of $150.53 on 2 January 2020 to $91.85 on 23 March 2020, compared to a peak-to-trough drop of 33.9% for the S&P 500
- The stock fully recovered to its pre-Crisis peak by 9 September 2020
Global Financial Crisis (2008)
- CAT stock decreased 74.5% from a high of $86.98 on 19 July 2007 to $22.17 on 2 March 2009, whereas the peak-to-trough drop for the S&P 500 was 56.8%
- The stock fully returned to its pre-Crisis peak by 1 December 2010
Bringing It All Together: Implications for CAT Stock
In conclusion, Caterpillar’s performance across the outlined parameters is summarized as follows:
- Growth: Neutral
- Profitability: Neutral
- Financial Stability: Weak
- Downturn Resilience: Neutral
- Overall: Neutral
In general, Caterpillar has performed moderately across the assessed metrics, which is evident in its present valuation. Even when we consider valuation from an adjusted earnings perspective, the stock seems to be reasonably priced. Currently, CAT stock trades at 17x trailing earnings, which is below its five-year average price-to-earnings (P/E) ratio of 19x.
We anticipate that the current dip in demand will be temporary for Caterpillar. We predict revenues will shrink in the low single digits in 2025 but expect a return to mid-single-digit growth starting in the following year.
Nevertheless, investors should remain cognizant of potential risks. In the face of unfavorable macroeconomic conditions, CAT stock could underperform the overall market, as it has in previous downturns. Furthermore, the existing weakness in demand may continue, particularly if interest rates stay elevated.
Although CAT stock appears attractive, investing in a single stock can be perilous. Conversely, the Trefis High Quality (HQ) Portfolio, comprising 30 stocks, has a proven record of comfortably surpassing the S&P 500 over the past 4-year period. What accounts for that? As a group, HQ Portfolio stocks have generated superior returns with lower risk compared to the benchmark index; a smoother investment journey, as reflected in HQ Portfolio performance metrics.
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