This Company Avoided the Curse of 2022

After a disappointing earnings season for tech companies, our proprietary stock-search data showed a marked increase in cash-flow-positive and profitable companies.

Specifically, Caterpillar (CAT), the heavy equipment and machinery stock, spiked to financial pros’ #1 search in its category over the last month. 

We’ve seen it with some tech stocks, including Apple (AAPL) and Meta (META).

But this one stood out among the cash flow titans because the group includes Procter & Gamble (PG), Pfizer (PFE), and Walmart (WMT), all somewhat safe plays.

Yet Caterpillar relies on global growth, ideally construction, to elevate its earnings.

We dug into (pun!) the company’s financials to see what’s what.

Caterpillar’s Business

Caterpillar is the world’s leading construction and mining equipment manufacturer. It makes off-highway diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives.

The company breaks down its business into the following segments: construction industries, resource industries, and energy & transportation.

CAT generates half its revenues from North America. It also draws sales from the Latin America, Europe-Africa-Middle East, and Asia-Pacific regions.

As the table above shows, the majority of revenues come from construction and energy & transportation.

Interestingly, both had decent growth year over year.

Financials

Revenues shot up considerably over the last six years, from $38.5 billion in 2016 to $50.9 billion in 2021. 

CAT is on pace to have its best revenues in the company’s history. 

Its 12-month trailing revenues are $56.6 billion. The firm credits its increase in sales volume to changes in dealer inventories, more equipment sales to end users, and more services. 

Moreover, it’s seen a boost across its three primary segments. 

In Q3 2022, CAT repurchased $1.4 billion in stock and paid out $600 million in dividends. Annualized, that’s roughly $20 per share, or an almost 10% yield.

The company has $7.4 billion in cash and $36.5 billion in total debt. It’s in an excellent financial position, as its 1.4x current ratio shows. 

Valuation

CAT trades at a P/E GAAP ratio of 16.6x, substantially lower than its five-year average of 28.6x. 

That’s better than rival Deere & Company (DE) at 19.9x. But it’s not as low as some of its smaller competitors, Komatsu (KMTUY) at 9.5x, Terex Corporation (TEX) at 11.2x, and AB Volvo (VLVLY) at 11.3x.

The same is true with Caterpillar’s price-to-sales ratio. At 2.1x, it beats out DE at 2.5x, but it’s not as low as KMTUY at 0.9x, TEX at 0.7x, and VLVLY at 0.88x. 

It’s worth noting that CAT is 6x the size of KMTUY, 42x the size of TEX, and 3x the size of VLVLY. 

Profitability

In Q3 2022, CAT improved its sales and revenues by 21%, operating margin by 46%, and profit per share by 49%.

The firm has an EBITDA margin of 19.6%, which its rivals don’t match. The closest competitor, DE, is at 18.6%. KMTUY is at 16.9%, TEX is at 9.9%, and VLVLY is at 11.1%. 

CAT has an impressive 45.6% return on equity. Its nearest rival is DE at 35.3%. 

With a net income margin of 13%, CAT outshines the rest. DE comes close at 12.7%, while the others are not as strong. KMTUY is at 9.4%, TEX is at 6.3%, and VLVLY is at 7.7%. 

Growth

The sector remains strong even with the global economy showing signs of weakness. 

For example, CAT’s revenue has grown 16.9% YoY. 

Meanwhile, DE has grown its revenues by 14%, KMTUY 24%, TEX 13.7%, and VLVLY 20.3%. 

Our Opinion 8/10

CAT has outperformed the overall market in 2022 and is trading near its 52-week highs. 

It’s a leader in its category, and it’s trading at a relatively low P/E multiple. 

While we don’t like buying stocks at highs, we believe this is a strong company and you should have some exposure. 

Consider building a starter position here. Look to accumulate if it gets down to the $210 range.

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