Caterpillar Stock (CAT): Is It a Good Buy?
The construction company Caterpillar (CAT) performed well in 2020, and its stock value reflects that, continuing to rise in 2021. It’s one of the highest performing stocks on the Dow Jones Industrial Average this year, so the question is should you invest in Caterpillar?
Before you invest, it’s important to understand why Caterpillar is trending so high in the market. Business results aren’t necessarily driving its market performance.
The COVID-19 pandemic tested many companies in 2020, and Caterpillar wasn’t an exception. But the post-pandemic enthusiasm in new construction is expected to help this company — and its stock — thrive in the years ahead.
Established in 1925, Caterpillar is a global leader in its industry. It promotes sustainability alongside cutting-edge technology. The company operates on every continent across three business segments:
- Construction industries
- Resource industries
- Energy and transportation
In 2020, Caterpillar had one of the worst single-quarter performances in its history. Still, past performance isn’t always indicative of future success. Caterpillar is expected to do well in the 2021 bull market.
Post-pandemic, people are ready to return to a sense of normalcy. Government stimulus checks are invigorating the economy and oil prices are on the rise. Caterpillar hopes to capitalize on the market and rebound from a disappointing year.
Before investing in a stock, assess your overall portfolio. You should maintain a balance of safer, long-term investments and riskier stocks. How does Caterpillar fit into your portfolio?
Rebounding After the Pandemic
In 2020, Caterpillar’s revenue declined 22% year-over-year. Even worse, it saw profits decline 42%. But things began trending upward again in the fourth quarter of 2020.
Expectations are for construction to rebound following the pandemic. New construction is expected to remain steady in 2021, but experts predict that demand will increase.
Caterpillar has a business model that depends on businesses utilizing its inventory. When dealers anticipate that sales are rising, they invest in equipment. One reason for the severe decline in 2020 is that dealers dropped inventory to the tune of $1.1 billion in the fourth quarter.
Caterpillar trends heavily with market cycles. This means that its value follows the general flow of the stock market as a whole. Caterpillar was preparing for an upswing when the pandemic struck in 2020.
Good To Know
Caterpillar had relatively strong first-quarter results for 2021. While Caterpillar’s $639 million in revenues for the first quarter of 2021 were 8% lower than they were during the same period last year, the company reported netting $140 million — a 56% jump compared to its 2020 first-quarter results.
When it comes to investing, you’re often comparing apples to oranges across a range of industries. Still, it’s important to know how Caterpillar performs within its own industry — and Caterpillar is outperforming its peers.
One ranking system called Zacks Sector Rank places Caterpillar as the number 2 buy option out of 218 industry peers. The Zacks Rank model uses a multitude of factors to rank investment opportunities, and typically favors companies that have favorable outlooks for the future, like Caterpillar.
|Company||May 2020 Value||May 2021 Value|
Looking to the Future
Caterpillar is ready to benefit from an overall upswing in the market this year. More than half of its revenue comes from outside the U.S., so the global market contributes significantly to the company’s performance.
Because other areas of the world like Asia, Europe, Africa, and the Middle East remained steady in 2020, Caterpillar is poised for future success.
Caterpillar showed it’s here to stay by pursuing an acquisition during a questionable market. Weir Group’s division of Weir Oil and Gas was renamed SPM Oil and Gas in February 2021. Based on current crude oil prices, Caterpillar made a wise financial decision in finalizing this acquisition.
Caterpillar is committed to a $2.2 billion annual dividend. The fact that it had cash on hand to cover this dividend despite the pandemic is an excellent sign of strength. Strong cash flow shows that the company doesn’t rely on debt to hold it up in difficult times.
Something that sets Caterpillar apart from other stocks is that the company consistently increases its dividend payouts year after year. In fact, it has achieved the distinction of being recognized as a dividend aristocrat for increasing dividends 27 years in a row.
This alone makes Caterpillar a wise investment because it shows that the company has:
- The ability to overcome challenges
- A commitment to shareholders
- Discipline in financial management
- Longevity in the market
What To Consider Before Investing
For years, Caterpillar has maintained an image of sustainability, but the pandemic revealed that this may not be accurate. Weaknesses were revealed when Caterpillar took a hit because of dealers dropping stock. Plus, even though revenues are up, they haven’t yet reached pre-pandemic numbers again.
When investing in Caterpillar, keep an eye on dealer inventory of the Caterpillar brand. You can anticipate an upward trend, but no one knows when it will begin or how far it will go.
If you want to have a fair comparison of Caterpillar’s current stock valuation, skip over 2020 and take a look at its numbers for 2019. This company has a strong history of being a good long-term investment, but only time will tell how much of an increase it sees in the years to come.
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- Caterpillar 2020 Annual Report. "2020 Performance at a Glance."
- Contractor. 2021. "2021 Industry Forecast."
- Caterpillar. 2021. "Cat Financial Announces First Quarter 2021 Results."
- Yahoo Finance. 2021. "Is Caterpillar (CAT) Stock Outpacing Its Industrial Products Peers This Year?"
- Nasdaq. "Caterpillar, Inc. Common Stock (CAT) Stock Quotes."
- Caterpillar. "Caterpillar Acquires Weir Oil & Gas, Launches SPM Oil."
- Caterpillar. 2021. "Caterpillar Inc. Maintains Dividend."
- Forbes. 2020. "What Are The Dividend Aristocrats?"