Looks Like Caterpillar’s Ready to Lead Industrials

The original 1921 photo of a Caterpillar tractor with an advertising banner.

Needless to say, Caterpillar’s stock had a wild 2020. Going forward, 2021 will have us all fixated on the global economic recovery. Caterpillar [$CAT], between the end of December 2019 and the end of June, dipped more than 14%, worse than the 4% and 10% respective drops of the S&P 500 and the Dow.

Even so, between the end of June and late December 2020, shares bounced back almost 43%. Those price fluctuations say a lot about how investors viewed the global economy. The middle of the year was close to peak virus trepidation, and the global economy was in extremis. But as the likelihood for effective vaccines has improved, so have investors’ optimism. 

There’s another way to portray investor bullishness. At the beginning of 2020, Caterpillar stock was trading for about 14 times forward year estimated earnings, a discount to the 17 times multiple of the S&P 500. Now Caterpillar stock is trading for about 33 times estimated 2021 earnings, a premium to the 22 times multiple of the S&P 500.

This chart of enterprise value to EBITDA shows that Caterpillar’s valuation is already quite high. Moreover, a decline in earnings in the fourth quarter is expected to lead to an EV/EBITDA multiple of nearly 21 at the end of the year.

There’s an old Wall Street adage that says, essentially, Caterpillar stock is a sell when the P/E is low and a Buy when the P/E is high. That’s because Caterpillar is a cyclical stock and when the P/E is high it means earnings are depressed and things are turning around. When the P/E is low the global economy has peaked and might be due for a breather.

Caterpillar, for its part, is laser-focused on what it can control; advancing connectivity of its machines and offering some services that might produce recurring sales for the company in the future. It’s a solid approach, but for now it remains a cyclical stock.

Around 40% of Wall Street analysts slapped Caterpillar’s stock with a Buy at the beginning of 2020. The average Buy-rating ratio for stocks in the Dow is about 58%. By June, Caterpillar’s stock Buy-rating ratio had jumped about 45%. Today, about 48% of analysts rate shares a Buy, still a little below average, but elevating along with the outlook for the global economy.

This chart shows that Caterpillar’s retail sales appear to have bottomed and look like they will turn positive in 2021, just as they did in 2017.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s