Building a Bull Case for Caterpillar Inventory

Caterpillar (NYSE:CAT), a large construction and mining equipment seller, was largely ignored last year as Wall Street still focused too heavily on Magnificent Seven technology stocks. But today, Caterpillar stock is soaring, and the company is finally getting the attention it deserves.

Years ago, commentators said General Electric’s (NYSE:GE) financial performance was a good gauge of the overall health of the U.S. economy. Now fast forward to the 2020s and Caterpillar can be considered the best gauge.

After all, if businesses don’t buy construction equipment, that probably means homes, offices and shopping centers won’t be built. Let’s take a closer look at Caterpillar’s recently released financial information to see if it has a broader impact on the U.S. economy.

Big moves in Caterpillar stock

Caterpillar stock is up 5% this morning, following a nearly 2.5% gain on Friday. This is a big move for a stock above $400 that is not known for its volatility.

So it appears the market is ready for a rotation into a steady Eddie stock like CAT stock. This will be a welcome development for investors who have had enough of Magnificent Seven to do all the heavy lifting.

This is also a sign that the U.S. economy is recovering, even if interest rates are still rising.

“This stock has really become an indicator not only of the industrial economy but of the global economy as a whole. It was also more resilient than we expected,” said Oppenheimer & Co. Kristen Owen, Executive Director of Inc., explained:

Globally, there is a mix of good and bad news for Caterpillar. The company’s North American sales increased 4% year-over-year in the fourth quarter. However, sales in the Asia-Pacific region fell 5%.

China’s sluggish real estate market is likely to be a factor in causing this gap. Additionally, given that the U.S. government has invested heavily in upgrading the country’s infrastructure, this may have had a positive impact on North America.

Caterpillar’s particular strength in the fourth quarter was its Energy and Transportation segment. The division’s profits increased 21% year over year to $1.429 billion. Caterpillar attributes this to “favorable pricing and increased sales.”

Perhaps “favorable price realization” is just a fancy way of saying that Caterpillar has increased the prices of its equipment in the energy and transportation sectors, and apparently companies are willing to pay more for this equipment. Meanwhile, “increasing sales” speaks for itself and is a positive sign for Caterpillar and perhaps the economy as a whole.

Caterpillar impresses when it comes to profits and margins.

Caterpillar’s total revenue of $17.1 billion in the fourth quarter of 2023 represents a 3% improvement over its $16.1 billion revenue in the same period last year. Moreover, this result is consistent with the $17.1 billion expected by Wall Street.

In other words, Caterpillar’s overall sales results were good, but not blockbuster. As a result, the market’s sudden enthusiasm for CAT stock certainly wasn’t due to the company’s in-line quarterly sales.

What’s even more impressive is Caterpillar’s ability to control operating costs during periods of declining but still high inflation. Caterpillar’s total operating expenses in the fourth quarter were $13.936 billion, compared to $14.917 billion in the year-ago quarter.

Caterpillar’s cost containment may help explain its notable growth in operating profits. Specifically, the company’s operating profit nearly doubled, increasing from $1.68 billion in the year-ago quarter to $3.134 billion in the fourth quarter of 2023. This doesn’t mean much about the U.S. economy in general, but it does get Caterpillar on the right track.

Now looking at earnings, Caterpillar earned $5.23 per share in the fourth quarter. This is a significant improvement over the $3.86 per share the company earned in the same period last year. The results also beat Wall Street’s consensus earnings per share estimate of $4.76.

Lastly, I’d like to point out Caterpillar’s improving operating margin. This goes back to the concept of cost savings. As it turned out, Caterpillar’s operating margin for the fourth quarter was 18.4%, which was a significant improvement over the 10.1% it reported for the fourth quarter of 2022.

So in some ways Caterpillar is just as good as any Magnificent-Seven company. It’s nice to see the market finally taking notice of the company, even if it’s just for a day or two. So if the U.S. economy remains stable in 2024, feel free to pick up a few shares of CAT stock as they will likely gain significant value.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.