Caterpillar Inc. CAT has been on an impressive upward trajectory recently. Over the past five trading sessions, the CAT stock trended at more than $390 per share, closing at $394.05 yesterday. This is just 1% below its 52-week high of $397.22 reached on Sept. 26.
This momentum was fueled by several developments, including China’s stimulus measures, BHP Group’s BHP decision to test the groundbreaking Cat Dynamic Energy Transfer (“DET”) system and the extension of Caterpillar’s joint venture with Trimble.
Caterpillar shares have jumped 17% over the past month compared with the industry’s 16.4% growth. It has outpaced peers like Komatsu KMTUY and Terex TEX.
CAT’s 1-Month Price Performance
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Technical indicators suggest continued strong performance for CAT. The stock is trading above its 50-day and 200-day moving averages, as shown in the chart below.
This reflects positive market sentiment and investor confidence in SIG's financial health and growth prospects.
CAT Trading Above 50-Day & 200-Day SMA
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Factors Supporting CAT Stock’s Growth
China’s Stimulus Measures to Boost Demand for Caterpillar
China recently announced its largest stimulus package since the pandemic in an attempt to revive its economic growth to its 5% target for 2024. This has led to a surge in metal prices as China is a major consumer of ferrous and non-ferrous metals. This is expected to create opportunities for CAT’s mining equipment.
Caterpillar’s Resource Industries segment has witnessed declines in volumes and revenues in the past few quarters as low commodity prices impacted demand. Metal prices so far this year have been affected by weak demand in China. This rebound in metal prices is likely to improve the segment's results. Also, a recovery in China’s construction sector could aid CAT’s Construction Industries segment, which has seen negative growth in the Asia Pacific region in the past four quarters due to China’s slowdown.
CAT’s New DET System to be Boon for Miners
Caterpillar recently launched its Cat DET system that can transfer energy to both diesel-electric and battery-electric large mining trucks while they are working around a mine site. The system, which can be customized per different mine sites, will help miners lower their operating costs and improve efficiency. Miners will be able to achieve production targets while meeting their energy demands and lowering greenhouse emissions.
BHP recently announced plans to trial CAT’s DET system at its mining site. Caterpillar’s efforts to enhance its autonomous capabilities and introduce innovative products with a focus on sustainability have made it the preferred choice among miners.
CAT-Trimble JV Extended to Improve Grade-Control Technology
Caterpillar and Trimble have renewed their long-standing joint venture agreement to enhance grade control technologies and expand distribution options in the construction sector.
The partnership goes back to 2002 and since then, the Caterpillar Trimble Control Technologies (“CTCT”) joint venture has focused on improving job site safety and productivity through advanced grade-control products. With a focus on improving on this leading-edge technology, Caterpillar and Trimble will try to increase industry reach and customer adoption.
CAT Delivers Consistent Earnings Growth
Caterpillar reported year-over-year improvements in earnings per share (EPS) for fourteen straight quarters. This demonstrates the company’s resilience amid the challenges faced during this period, including the pandemic, supply-chain disruptions and prolonged contraction in the manufacturing sector since November 2022.
The chart below shows an upward trend in CAT’s EPS over the past three years. This feat was achieved by the company’s cost-saving strategies, pricing actions and strong demand in its end markets.
CAT’s EPS Trend in Past 3 Years
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CAT is poised to take this momentum forward. The increase in projects enabled by the U.S. Infrastructure Investment and Jobs Act creates massive opportunities for its wide range of construction equipment. The worldwide efforts in the transition to clean energy will require a huge amount of commodities, which will boost demand for Caterpillar’s mining equipment.
In Energy & Transportation, strong order rates in most applications are expected to support revenues. In the Oil & Gas sector, the increased focus on sustainability will drive the demand for CAT equipment. As technology companies establish data centers globally to support their generative AI applications, Caterpillar is witnessing robust order levels for reciprocating engines for data centers. The company is planning to double its output with a multi-year capital investment.
CAT has been seeing growth in aftermarket parts and service-related revenues, which generate high margins. Caterpillar is on track to double its services revenues from $14 billion in 2016 to $28 billion in 2026.
Northbound Estimates for CAT
Earnings estimates for Caterpillar for 2024 and 2025 have moved up over the past 60 days.
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The estimate for 2024 indicates year-over-year growth of 3.3% and that for 2025 suggests a 4.65% rise.
Caterpillar has a five-year dividend growth rate of 6.1%. Its 1.43% dividend yield is higher than the sector’s yield of 1.38% and the S&P 500’s 1.24%. The company has a solid track of paying higher dividends to shareholders for 30 straight years and is a member of the S&P 500 Dividend Aristocrat Index.
CAT’s return on equity — a profitability measure of how prudently the company is utilizing its shareholders’ funds — is 59.9%, higher than the sector’s average of 22.3% and the S&P 500’s 29.4%.
Caterpillar Trades at a Premium to Industry
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CAT is currently trading at a forward 12-month P/E of 17.37X compared with the industry’s 16.33X. Its peers, Komatsu and Terex, are trading below the industry.
To Sum up: Hold on to CAT Stock
Recovery in demand in China, boosted by the recent stimulus measures, will boost the need for Caterpillar’s equipment. The company’s long-term demand prospects are well-supported by increased infrastructure spending and the ongoing shift toward clean energy. Its commitment to introducing innovative solutions and products (the latest being the DET system) provides a competitive edge. The company is also returning value to shareholders through consistent dividend payments.
Existing stakeholders should maintain their position in this Zacks Rank #3 (Hold) stock, while new investors should wait for a better entry point, given its premium valuation.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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