Caterpillar (NYSE: CAT) recently released its Q4 results, with revenue missing and earnings exceeding the street estimates. It reported revenue of $16.2 billion and adjusted earnings of $5.14 per share, compared to the consensus estimate of $16.4 billion and $5.02, respectively. Lower dealer inventory levels weighed on the company’s top-line. Furthermore, the company expects sales and profitability to trend lower this year.
This didn’t sit well with the investors, and the stock saw a 5% dip on Thursday, January 30. CAT stock, with 29% returns since the beginning of 2024, has performed in-line with the S&P 500 index, up 27%. But, if you want upside with a smoother ride than an individual stock, consider the High-Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.
How Did Caterpillar Fare In Q4?
Caterpillar’s revenue of $16.2 billion in Q4 was down 5% y-o-y. Looking at segments, the Construction Industries revenue was down 8%, Resource Industries sales were down 9%, while Energy & Transportation revenue were flat y-o-y. Caterpillar saw its adjusted operating margin contract by 60 bps to 18.3% in Q4. A decline in sales clubbed with margin contraction resulted in earnings of $5.14 per share, versus $5.23 in the prior-year quarter.
Caterpillar’s sales were weighed down due to lower dealer inventory levels as overall demand remains soft. This can be attributed to elevated interest rates and a high inflationary-environment. Looking forward, Caterpillar expects dealer inventory levels in 2025 to remain similar to levels seen toward the end of 2024. Taking into account the soft demand, Caterpillar will find it difficult to push the pricing higher. In fact, the company expects a slight decline in revenues this year, after seeing a 3% y-o-y decline in 2024.
What does this mean for CAT stock?
Although Caterpillar posted better than anticipated earnings, a top-line miss and a bleak outlook resulted in its stock seeing a 5% fall post the results announcement. Notably, CAT is one of a handful of stocks that have increased their value in each of the last 4 years. But, that still wasn’t enough for it to consistently beat the market. Returns for the stock were 16% in 2021, 19% in 2022, 26% in 2023, and 25% in 2024.
In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is less volatile. And it has comfortably outperformed the S&P 500 over the last four-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment around rate cuts and geopolitical tensions, could CAT face a similar situation as it did in 2021 and underperform the S&P over the next 12 months — or will it see a strong jump? While we will soon update our model for CAT to reflect the latest results, we think its stock is appropriately priced despite its recent decline. At its current levels of $375, CAT stock is trading at 17x trailing earnings of $21.90 per share. This compares with the stock’s average P/E ratio of 19x over the last five years. However, a slight decline in valuation multiple seems justified, given the underwhelming outlook for sales as well as profitability in the near term.
While CAT stock looks like it is fully valued, it is helpful to see how Caterpillar’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
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