Caterpillar Inc. (NYSE: CAT) stock is considered a bellwether because demand for its products is a signal for the broader economy. So, it’s important to understand why CAT stock is up more than 12% after earnings, and why it may just be getting started.
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The headline numbers for the company’s report were strong. Revenue of $17.64 billion beat expectations for $16.77 billion by a comfortable 5.15%. Earnings per share (EPS) of $4.95 beat the forecasted $4.52 by an even more impressive 9.4%. The company also now increased its full-year revenue guidance and is forecasting a slight year-over-year (YoY) gain.
On a YoY basis, revenue was up 10%. However, EPS was down about 4%, largely due to tariff impact. Still, investors have looked past that headwind and have pushed the stock within striking distance of $600.
The reason for the bullish sentiment stems from the evidence that Caterpillar has evolved from an equipment manufacturer into a key player in the technology-integrated industrial market.
CAT Stock: A Sum of Its Parts Story
The bull case for Caterpillar is not just about its iconic yellow earthmovers and bulldozers. If you’re a CAT stock shareholder, you know about the company’s expanding business verticals that encompasses both the “digital economy” and the “real economy.”
- Construction Industries
- Resource Industries
- Energy & Transportation
In the press release announcing its quarterly results, Caterpillar chief executive officer (CEO) remarked, “Solid performance from our team generated strong results this quarter, driven by resilient demand and focused execution across our three primary segments, … Our team’s continued discipline in a dynamic environment, coupled with a growing backlog, positions us for sustained momentum and long-term profitable growth.”
Looking at each sector individually is important for putting the earnings report in context.
Construction Industries
Revenue was up about 7% year-over-year to $6.8 billion, over one-third of the company’s total revenue. This is not insignificant since this sector’s revenue was down by about the same percentage in the prior quarter. The company continues to see softness in residential construction. However, that’s being offset by what analysts have termed “stabilizing” in its commercial business.
The important takeaway for investors is that while Caterpillar serves as a proxy for the real economy. That should get a boost from lower interest rates that will facilitate spending. Plus, many companies have committed billions of dollars to onshoring activity in the United States. At some point those picks and shovels will turn into revenue for Caterpillar.
Resource Industries
This area of the company focuses on the design, manufacturing, and support of machinery and solutions for mining, quarrying, and heavy material handling operations. It’s closely tied to commodity and mining cyclers. That means its performance has a strong correlation with demand for metals, minerals and aggregates.
Revenue was down 4% YoY at $3.1 billion. However, the company did report higher sales from mining-related activities. Demand for precious metals, copper, and rare earth minerals is likely to be a catalyst for this business unit. As is Caterpillar’s announcement that it will acquire RPMGlobal Holdings Limited, an Australian-based software company focused on mining software, simulation, and consulting solutions.
Energy & Transportation
This was the real star of the earnings report. Caterpillar has become a key player in providing power generation for data centers. That was evident in the division’s revenue of $8.4 billion, which was an increase of 17% from the prior year.
With hyperscalers making significant capital expenditure commitments to data centers for the next five to 10 years, this business unit will continue to drive growth in Caterpillar even as its other business units, pick up steam in coming quarters.
Earnings Headwinds Should Die Down for CAT Stock
Earnings growth is the best predictor of stock price growth. So, it’s fair to be suspicious about the jump in CAT stock after the company’s earnings per share came in 4% lower on a year-over-year basis.
The issue continues to be tariffs. In fact, Caterpillar reported that the net impact of tariffs came in near the top end of its prior guidance of between $500 million and $600 million. The company also raised its forecast for annual tariff costs to a range between $1.6 billion and $1.75 billion. The company’s prior guidance was for a range between $1.5 billion and $1.8 billion.
Yet the stock is moving higher. That’s likely because an earnings report looks backward. But the story for Caterpillar is just getting started.
Strong Fundamentals Seal the Growth Case
With its status as a dividend aristocrat (having increased its dividend for 30 consecutive years), Caterpillar has always been considered a strong value play for buy-and-hold investors.
However, over any length of time, the total return in CAT stock also makes it an exceptional growth stock. The company’s strategic pivots into areas like mining and AI infrastructure will help take some of the cyclicality out of the stock and boost revenue in meaningful ways.
That’s backed by a strong return on equity (ROE) of 48.95% and a manageable debt-to-equity ratio of 1.5%. Ideally, investors would like to see a slightly more attractive valuation. At 26x forward earnings, CAT stock trades at a premium to the S&P 500 and to its own historic numbers. However, the sharp move after earnings will likely lead to a pullback that may create a better entry point.
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