Caterpillar Stock: Is It a Good Buy?

An image of a cat logo on a excavator, caterpillar - Reinerbeck/Germany - 09/21/2017.
Ulf Wittrock / Shutterstock.com

The construction company Caterpillar (CAT) performed well in 2020, and its stock value reflected that, continuing to rise throughout the entire year. In early 2021, higher costs and a general decline in industrial stocks triggered a sell-off. Although shares haven’t returned to their 52-week high of $246.10, they have held relatively steady over the last six months. So the question is, should you invest in Caterpillar?

Before you invest, it’s important to understand why Caterpillar trended so high before the sell-off and why it might go back on the upswing in the coming months. Business results haven’t necessarily driven its market performance.

The COVID-19 pandemic has tested many companies, and Caterpillar is no exception. But post-pandemic enthusiasm in new construction is expected to help this company — and its stock — thrive in the years ahead.

About Caterpillar

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

Pandemic Struggles

In 2020, Caterpillar had one of the worst single-quarter performances in its history. Still, past performance isn’t always indicative of future success, especially in extraordinary circumstances. Caterpillar was expected to do well in the 2021 bull market and generally did.

Building Wealth

As the pandemic wanes, people are ready to return to a sense of normalcy. Government stimulus checks invigorated the economy and oil prices were on the rise as 2021 drew to a close. Caterpillar hoped to capitalize on the market and rebound from a disappointing year.

Caterpillar’s Earnings Results

Expectations were for construction to rebound as the pandemic eased. Caterpillar’s fourth-quarter results suggest that this is the case. Construction sales rose 27% compared to Q4 2020, driving overall fourth-quarter 2021 sales up 23% year over year, largely due to higher end-user demand, the impact from changes in dealer inventories and favorable price realization, Caterpillar reported in its release. Profit margins declined slightly, from 12.3% in Q4 2020 to 11.7%. Profit per share more than doubled from $1.42 in Q4 2020 to $3.19 in Q4 2021, due in part to a lower-than-expected effective tax rate.

Caterpillar’s Trend

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. However, inventories increased during Q3 and Q4 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.

Building Wealth

Good To Know

Caterpillar had strong fourth-quarter results for 2021, beating earnings estimates. Caterpillar’s $13.8 billion in revenues for the quarter were 23% higher than they were during the same period last year. The company reported netting $695 million for the year — a 60% jump compared to 2020.

Competitor Comparison

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 top 44% among the 16 sectors considered. Caterpillar’s industry sector, Construction and Mining, ranks in the top 40% 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 February 2022 Value February 2021 Value
Caterpillar $201.50 $197.28
General Electric $99.88 $92.32
Broadwind $1.85 $10.62
Cleveland-Cliffs $19.87 $15.92
Polar Power $2.74 $19.50
Prices are closed prices from Feb. 8, 2022, and Feb. 9, 2021.

Looking to the Future

Caterpillar benefitted from an upswing in the market last year. Almost 40% of its revenue comes from outside the U.S., so the global market contributes significantly to the company’s performance.

Caterpillar Chairman and CEO Jim Umpleby noted in the earnings report that the company’s global team had shown “resilience in what proved to be a challenging and dynamic operating environment,” but he said that global markets were generally improved.

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 2021 crude oil prices and continued demand, Caterpillar made a wise financial decision in finalizing this acquisition.

Dividend Distinction

Caterpillar paid $2.3 billion in dividends and repurchased $2.7 billion in stock in 2021. The fact that it had this much cash on hand 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 a dividend aristocrat for increasing dividends 28 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 rocky 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, 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.

Advice

Before investing in a stock, assess your overall portfolio and consider how Caterpillar would fit into it. You should maintain a balance of safer, long-term investments and riskier stocks.

Daria Uhlig contributed to the reporting for this article.

Data is accurate as of  Feb. 9, 2022, and subject to change.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

About the Author

Katy Hebebrand is a freelance writer with eight years of experience in the financial industry. She earned her BA from the University of West Florida and her MA from Full Sail University. Since beginning to work full-time as a freelance writer three years ago, she has written on topics spanning many fields, including home building, families and parenting, legal and professional/corporate communications.

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