Caterpillar Stock (CAT): Is It a Good Buy?
The construction company Caterpillar (CAT) performed well in 2020, and its stock value reflected that, continuing to rise through the first half of 2021, when higher costs and a general decline in industrial stocks triggered a selloff. Shares dipped about 14% during the first two weeks of June and trended downward through the second quarter. However, shares are up nearly 10% over the last 30 days. That and strong third-quarter earnings could indicate that the stock is bouncing back. So the question is, should you invest in Caterpillar?
Before you invest, it’s important to understand why Caterpillar trended so high before the selloff and why it might be on the upswing now. Business results haven’t necessarily driven its market performance.
The COVID-19 pandemic tested many companies in 2020, and Caterpillar wasn’t an exception. But 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 was expected to do well in the 2021 bull market.
As the pandemic wanes, people are ready to return to a sense of normalcy. Government stimulus checks have invigorated 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 were for construction to rebound as the pandemic eased. Caterpillar’s third-quarter results suggest that this is the case. Construction sales rose 30%, driving overall third-quarter sales up 25% compared to the third quarter of 2020, largely due to higher end-user demand, particularly in non-residential construction, Caterpillar reported in a statement. Profit margins were also up — 13.4% vs. 10% for the same quarter last year — and profit per share more than doubled, from $1.22 in 2020 to $2.60 in Q3 2021.
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 of 2021. However, inventories increased during Q3 2021, according to the earnings report.
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 strong third-quarter results for 2021, beating earnings estimates. Caterpillar’s $762 million in revenues for the third quarter of 2021 were 5% higher than they were during the same period last year. The company reported netting $173 million — a 22% jump compared to its 2020 third-quarter results.
When it comes to investing, you’re often comparing apples to oranges across a range of industries. It’s important to know how the industry is doing overall so you can look at Caterpillar’s performance in that context.
One ranking system, called Zacks Sector Rank, grades 16 different sectors according to the performance of stocks within that sector. Caterpillar is in the Industrial Products sector, which ranks in the bottom 13% among the 16 sectors considered. Caterpillar’s industry sector, Construction and Mining, ranks in the bottom 29% in Zacks Industry Rank.
Zacks ranks Caterpillar itself as a number 3, for “hold,” over the next one to three months. A 3 rating correlates with a 10.62% annualized return prediction. To put that in perspective, a 2, for “buy,” correlates with a 19% annualized return, and a 4, for “sell,” correlates with a 6.30% annualized return.
|Company||November 2020 Value||November 2021 Value|
|Prices are closed prices from Nov. 16, 2020, and Nov. 15, 2021|
Looking to the Future
Caterpillar is already benefiting from an overall upswing in the market this year. Almost 40% 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, and its cash reserves are larger this year than last. 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 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 as dealers dropped stock, and then as prices increased. Plus, even though revenues are up, they haven’t yet reached pre-pandemic numbers, and there could still be rock times ahead as supply-chain issues continue.
When investing in Caterpillar, keep an eye on dealer inventory of the Caterpillar brand. You can anticipate an upward trend continuing, but no one knows 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 pre-pandemic 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.
Daria Uhlig contributed to the reporting for this article.
Information is accurate as of Nov. 16, 2021.
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- Caterpillar 2020 Annual Report. "2020 Performance at a Glance."
- Contractor. 2021. "2021 Industry Forecast."
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