Is Caterpillar a Buy?

PUBLISHED Apr 20, 2023, 2:52:17 AM        SHARE

img
imgStaff Writer

What is Caterpillar?

Caterpillar is an industrial company best known for its construction equipment. Some lesser known components of its business are diesel engines, mining equipment, and financing.

CAT construction

If you’re new to investing, when you assess a stock, you should ask yourself two fundamental questions: is this stock a good investment? And is this stock a good investment right now?

Caterpillar is a good long term investment. The executive team raved about their status as a dividend aristocrat on their Q4 2022 presentation. The company has increased their annual dividend for 29 years, so they definitely deserve the bragging rights. And there’s no games played with the dividend. The dividend comes straight out of earnings with a dividend payout ratio of 38%.

CAT free cash flow

Source: 4Q 2022 CATERPILLAR INC. EARNINGS CONFERENCE CALL

For reference, utilities with stable cash flows pay out 50 to 55 percent. Utilities playing games with their dividend will payout 80% or higher of their earnings. This is a potential sign that the dividend is about to get cut.

Caterpillar does have problems which are easier to see on a stock selection guide. To simplify what you’re seeing here, we want this graph to be up, straight and parallel. This means revenue IS GROWING (the up), growth is exponential (straight), and costs are under control (parallel profit line). Looking at the chart, you can see that caterpillar hasn’t been growing revenue too significantly.

CAT stock selection guide

For more information on the powerful stock selection guide tool, check out BetterInvesting &trade coreSSG for more information.

Since 2010, Caterpillar’s revenue has increased 83%, and while that’s great for a blue chip stock, don’t expect the kind of all-star growth we’ve seen with stocks like Tesla or Google.

What Caterpillar does provide is fantastic cash flow. The company has used this cash flow to pay its dividend, buy back shares, and reinvest in the company. In fact, the number of outstanding shares has fallen 18% since 2010. This is one reason why earnings per share has grown faster than revenue.

Total outstanding shares

How to Invest in Caterpillar

With a beta of 1.10, Caterpillar rises and falls with the market, albeit with higher highs and lower lows. Caterpillar is affected by the price of oil, the price of mined commodities, and the price of food. This is because Caterpillar’s equipment services these industries. So Caterpillar will have big swings in revenue, earnings, and price.

Caterpillar vs S&P 500 ETF

This stock is one you don’t want to hold on to when it’s overvalued, so reassessing its valuation at least quarterly is highly recommended.

Caterpillar is a long term hold that needs some TLC.

So is it a buy right now?

In Q2 2023, we assess Caterpillar as a sell. Caterpillar’s price stands around $209. This price looks to be significantly overvalued. We assess Caterpillar to be overvalued at $200, fairly valued at $182, and under-valued at $164.

CAT intrinsic value

We calculated Caterpillar’s fair market value by taking its $30.73 book value per share and adding it to a 10 year projected earnings per share outlook of $12.64 grown at a 7% rate and discounted at the current federal funds rate.

Where did 7% come from? We took the median annual EPS growth rate. Would average be better? Nope, because Caterpillar’s earnings growth is too volatile.

We dropped book value per share by two percent because Caterpillar took a $1 Billion Goodwill impairment to its rail unit. Being that Caterpillar noted the rest of their Goodwill assessments were fair or undervalued, this 2% risk assessment seems reasonable.

We also slapped a 2% risk assessment onto earnings. This comes mostly due to Caterpillars natural earnings volatility.

Finally Caterpillar stock likely suffers from the companies name recognition. Stocks with name recognition, and this is anecdotal, tend to hover above their calculated fair market value. If this conjecture is true, then it results in a premium to buy caterpillar. Wait until Caterpillar reaches your undervalued price point. Its also important to hold Caterpillar until its overvalued, and then protect yourself with limit orders. Caterpillar swings low due to its ties to commodities, but also swings high due to its brand recognition.

Happy Investing. Never invested before? The time to start is right now.

Want to learn more? Check out our video on Caterpillar:

https://youtu.be/LAmFAke7AKA

CAT, Buy

Caterpillar Inc.
Return: 71.08%

CAT, Buy

Return: 71.08%


Sound investments
don't happen alone

Find your crew, build teams, compete in VS MODE, and identify investment trends in our evergrowing investment ecosystem. You aren't on an island anymore, and our community is here to help you make informed decisions in a complex world.

More Reads
3 Dividend Kings for Long-Term Investors
Image

There are no better stocks for long-term dividend growth and creating passive income than the Dividend Kings. They have stood the test of time.

3 Bank Stocks for 2023
Image

Some banks, such as Silicon Valley Bank (SIVBQ), Credit Suisse, and so on, have recently made the news due to the problems they experienced.

The Best Long-Term Stocks To Buy In 2023
Image

Investing in long-term stocks helps one avoid most of the drama that the mainstream media loves to cover on Wall Street.

VOO vs. QQQ: Which ETF is a Better for the Long-Term?
Image

VOO and QQQ track different indices, the popular S&P 500 Index and Nasdaq-100, respectively. But they have some overlap, and both are extremely popular.

TD Bank Is A Top 10 North American Bank
Image

‘It’s common for people to say “I’m going to wait until the dust has settled.” But it is when the knives are falling and the people are most terrified that the best bargains are available – if you wait until the dust settles, the bargains are gone.’

Texas Instruments (TXN): Strong Performance, but Trading at a Premium
Image

Texas Instruments is the leader of the pact and one of the best in the industry. The company is off to strong start in 2023.

Recent Stock Purchase March 2023
Image

As you know by now I make a stock purchase every single month no matter what is going on in the world and despite the doom and gloom headlines.

Recent Stock Purchase/Sale February 2023
Image

As you know by now I make a stock purchase every single month no matter what is going on in the world and despite the doom and gloom headlines.

Dividend Income Update January 2023
Image

It’s dividend income update time. One of my favorite times of the month as I get to review my previous month of passive income received from my dividend income portfolio.

Is AES a Buy
Image

Considering buying AES stock? Learn about their operations, potential for growth, and risks involved before making any investment decisions.

Is EIX a Buy?
Image

Get expert analysis on EIX (Edison International) to determine if it's a good buy. Analyze financials, market trends, and future prospects to invest wisely.

ED Stock Forecast
Image

Get the latest ED stock forecast and analysis, including price predictions, news, and expert insights. Stay informed about the performance of Consolidated Edison, Inc., and make informed investment decisions with our comprehensive stock market data and forecasts.

Dividend Safety Analysis: Franklin Resources (BEN)
Image

The firm is a Dividend Aristocrat and Dividend Champion with 42 years of increases, which makes it interesting to dividend growth investors. The dividend has been raised continuously since 1981.

United Parcel Service (UPS) – Delivering Dividends in 2023
Image

The year of 2023 has already started in turbulent mode. The S&P 500 is up almost 4%, as inflation appears to have cooled on earlier reports. However, I think the economy is being overlooked, as I predict we are still in for a rude awakening.

Why I’m Investing into Vanguard Dividend Appreciation (VIG) ETF Daily!
Image

By the time of this article release, I have now had a daily investment into Vanguard’s Dividend Appreciation ETF (VIG), another wonderful Vanguard ETF. The community knows I buy Vanguard’s S&P 500 (VOO) daily and Vanguard’s High Dividend Yield (VYM) weekly, so what gives?

February 2023 Stock Considerations
Image

With a new trading month already in full swing it is time, once again, to highlight some of my potential stock purchases. While the market had a nice bounce in recent months there is still no shortage of stocks that are becoming fairly valued to undervalued.

Recent Stock Purchase January 2023
Image

It has been a very, very long time since I made two or more separate tranches of buys in a single month but sometimes the market has a flash sale and adding more shares is just too tempting to pass up.

Which Utility is Most Invested in Renewable Energy. Are They Worth Your Investment?
Image

U.S. utilities are on a path to convert their power generation fleets to renewable energy. But are they worth your investment?

The Top Utility Stocks by Wind Energy, but Should you Invest?
Image

The stock market may be selling renewable energy stocks at a premium. Let’s discuss which utility stock you should invest in that is also a good financial investment.

SCHD vs. VIG: Which Dividend Growth ETF Fits in Your Portfolio?
Image

Dividend-yielding ETFs (exchange-traded funds) have become the rage recently as tech stocks on the Nasdaq have plummeted, and people are seeking more income. So it is no surprise that people have been talking about dividend growth ETFs like SCHD and VIG.

Resources for Publishers
Resources for New Investors
Boosted with BossCoin
Financial Literacy Leaders
user_profile
Wise Intelligent
user_profile
Tom Hamilton
user_profile
Mark Robertson
user_profile
Kevin Matthews II
user_profile
Akeiva Ellis
user_profile
Brendan Dale
user_profile
Kenneth Chavis IV
user_profile
Sharita Humphrey