Blue chip powerhouse Caterpillar(NYSE: CAT) boasts a 29-year track record of increasing dividend payouts, a testament to its robust business and cash management. Today, the stock is trading near all-time highs after a strong year.
However, its strong performance also means the stock trades near a high valuation. With the stock near its peak, is this still a good buying opportunity today? Let's delve deeper to understand the business before deciding if Caterpillar belongs in your portfolio.
Caterpillar is a titan in heavy machinery
Caterpillar has been a dominant player in the heavy machinery industry for nearly a century. The company designs and manufactures heavy machinery crucial for construction, energy, mining, and transportation and is one of the world's top construction equipment suppliers and manufacturers.
Caterpillar produces $63.9 billion in annual sales come from three core segments:
- Construction industries: Machinery used in infrastructure, forestry, and building construction.
- Resource industries: Machinery and heavy equipment used to extract and haul precious resources like copper, iron ore, coal, gold, and other minerals that support the mining and resource extraction sectors.
- Energy and transportation: Equipment to support oil and gas exploration, power generation, and zero-emissions power sources.
Caterpillar's three segments offer it diversified revenue streams that aren' too reliant on a single industry. However, the company remains cyclical and can be vulnerable to underlying economic conditions that can impact its overall performance. As a result, Caterpillar's earnings can be hard to predict since no one knows what the economy will do over the next year or so.
Its business could see slower growth this year
One aspect of the economy that can influence Caterpillar's business is interest rates. When interest rates rise, it becomes more expensive for its customers in the mining, construction, and energy sectors to borrow money to finance equipment purchases. Rising interest rates can also dampen investments in construction projects if borrowing costs become too high and restrictive.
Despite rising interest rates in recent years, Caterpillar has shown resilience. In 2022, the company saw a solid 15% increase in operating profit to $7.9 billion across all its segments. This momentum continued into last year, with operating profit surging 64% higher to $13 billion, showing the company's ability to navigate the challenging environment.
Caterpillar's growth has been solid but is showing signs of slowing. In the fourth quarter, its revenue from construction and resource industries declined by 5% and 6%, while energy and transportation remained robust, growing by 12%. Going into 2024, Caterpillar's management is guiding for slowing growth, and analysts agree, projecting sales growth of 0.5% over the next year.
These trends could support long-term demand
Despite the cyclical nature of the business, Caterpillar has been a stellar stock for its long-term investors. The company has done an excellent job of raising its dividend annually for the past 29 years, and its stock has delivered average annualized returns of nearly 15% over that period. Those three decades include multiple recessions and periods of rising and falling interest rates, showcasing Caterpillar's resilience over the long haul.
Image source: Getty Images.
Going forward, Caterpillar could enjoy tailwinds driving longer-term demand for its heavy machinery and equipment. For one, the global infrastructure is aging and will need upgrades and replacement. In 2021, the U.S. passed the Infrastructure Investment and Jobs Act, which provides $550 billion in new funding through 2026 for upgrades to roads, power and grid, transportation, broadband, and water infrastructure.
Not only that, but the growing demand for resources could support the demand for heavy machinery. Rising populations, a growing middle class, and increasing demand for commodities such as electric vehicles and semiconductors could continue to drive demand for equipment needed to get these materials.
Buy, hold, or sell Caterpillar stock?
Caterpillar is a solid blue chip company with a long history of navigating economic cycles and has rewarded shareholders nicely in the process. The company is coming off a solid year, and the stock is up 65% over the past year. It isn't necessarily cheap at the moment, and with sales growth expected to slow in the near term, investors are probably best holding (or holding off) from the stock today.
Should you invest $1,000 in Caterpillar right now?
Before you buy stock in Caterpillar, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Caterpillar wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of March 21, 2024
Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
