Caterpillar Inc. (CAT – Free Report) gained 1.2% yesterday, adding $2 billion to its market capitalization despite the market downturn as President Trump unveiled a sweeping round of tariffs, calling it “Liberation Day” for U.S. trade policy. This came on the heels of the Institute for Supply Management’s report, which indicates that the U.S. manufacturing sector contracted in March after two months of expansion.
However, this single-day uptick does little to offset Caterpillar’s overall year-to-date underperformance. The CAT stock has lost 10%, underperforming the industry’s 8% decline, the Zacks Industrial Products sector’s 3% drop and the S&P 500’s 0.9% fall.
CAT Stock Underperforms Industry, Sector & S&P 500
Image Source: Zacks Investment Research
Given this scenario, investors are evaluating whether to secure profits or capitalize on potential gains. Let us analyze Caterpillar’s fundamentals to understand which option is the most prudent.
Factors Weighing on Caterpillar Stock
Declining Sales Volumes & Revenues: CAT’s volume growth has been declining for five consecutive quarters, reflecting muted consumer spending. This aligns with the recent reports of industry players like Terex Corporation (TEX – Free Report) and The Manitowoc Company (MTW – Free Report) , which have cited weak demand impacting their top-line results.
Caterpillar’s two major segments, Resource Industries and Construction Industries, have been hit hard. Resource Industries has seen volume declines for six consecutive quarters, while Construction Industries has been down for five. This negated the improved performance of the Energy and Transportation segment. Consequently, Caterpillar’s revenue growth has been in the red for the past 4 quarters, whereas earnings declined in the last two.
CAT’s performance has also been impacted by the downturn in China’s real estate sector. The demand for 10-ton and larger excavators, once a key market for CAT, has weakened significantly. Weak demand in Europe, also reported by Terex and Manitowoc, added to revenue pressures.
Muted Outlook for 2025: Caterpillar expects 2025 revenues to be a tad lower than the 2024 actual of $64.8 billion. The adjusted operating margin is, however, expected to be in the top half of its target range, corresponding to the anticipated level of revenues.
The company maintains its broad revenue guidance at $42-$72 billion, with margins between 10% and 22%. For revenues of $64.5 billion, CAT’s operating margin target is 16-20%.
Contraction in US Manufacturing Activity, Order Levels: After a prolonged 26-month contraction, the Institute for Supply Management’s manufacturing index showed brief expansion in January and February. However, this was cut short, with the index registering 49% in March.
The New Orders Index also contracted for the second month in a row and was 45.2% in March. It was the lowest since 43.4% in May 2023. Customers seem to be pulling in orders due to anxiety about continued tariffs and pricing pressures.
Downward Estimate Revision Activity for CAT
Earnings estimates for Caterpillar have moved down for both 2025 and 2026 over the past 60 days, as shown in the chart below.
Image Source: Zacks Investment Research
Find the latest earnings estimates and surprises on Zacks Earnings Calendar.
The Zacks Consensus Estimate for 2025 earnings indicates a year-over-year decline of 10.3%. The consensus mark for revenues suggests a drop of 2.3%. However, the earnings estimate for 2026 suggests 12.6% growth, with revenues rising 5.4%.
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
Caterpillar’s Lofty Valuation
CAT is currently trading at a forward 12-month P/S of 2.49X compared with the industry’s 1.82X. With a Value Score of C, the stock may not present a compelling value proposition at these levels.
Image Source: Zacks Investment Research
The Caterpillar stock also appears expensive compared with Terex and Manitowoc, which are trading below the industry at 0.49 and 0.14, respectively.
Tariffs: Weighing the Benefits & Challenges for CAT
Trump’s latest tariff plan includes a 10% minimum tariff on all imports and a 34% rate on Chinese goods. These tariffs, as well as the anticipated retaliatory measures, might lead to higher costs for the company. However, strategic pricing and ongoing cost-cutting initiatives can help counter this impact.
Conversely, the purpose of the tariffs on imported goods is expected to drive increased demand for the products made in the United States. Caterpillar, with its significant U.S. manufacturing presence and net exporter status, is well-positioned to capitalize on this surge, potentially gaining a competitive advantage over companies reliant on imports.
Caterpillar’s Competitive Strengths & Long-Term Potential
Sector-Leading Dividend Yield & Returns: The company has paid out higher dividends to shareholders for 30 straight years and is a member of the S&P 500 Dividend Aristocrat Index. Its 1.69% dividend yield outscores the sector’s yield of 1.49% and the S&P500’s 1.3%. The company has a five-year dividend growth rate of 7.4%. CAT has a payout ratio of around 26%, higher than the Terex’s 11.35%. Manitowoc currently does not pay dividends.
Caterpillar’s return on equity (ROE) is 59.1%, higher than the sector’s average of 20.1% and the S&P 500’s 31.1%. Meanwhile, Terex offers a ROE of 25%, while Manitowoc lags considerably with a ROE of 2.4%.
Long-Term End-Market Demand Holds Promise: Despite current headwinds, CAT stands to benefit from the surge in projects, driven by the United States Infrastructure Investment and Jobs Act, creating opportunities for its diverse construction equipment lineup. The shift toward clean energy will drive demand for essential commodities, boosting the need for Caterpillar’s mining equipment. Meanwhile, given their efficiency and safety, CAT’s autonomous fleets are gaining momentum among miners.
As technology companies establish data centers globally to support their generative AI applications, the company is witnessing robust order levels for reciprocating engines for data centers. It is planning to double its output with a multi-year capital investment.
CAT has been seeing growth in aftermarket parts and service-related revenues, which generate high margins. The company is on track to double its service revenues from $14 billion in 2016 to $28 billion in 2026.
Average Target Price for CAT Suggests Solid Upside
The average price target on Caterpillar suggests a 17.6% increase from its last closing price of $334.66. The highest target of $490 implies a gain of 46%. This indicates that current shareholders holding onto their shares could see significant benefits if the stock trends upward as projected.
Image Source: Zacks Investment Research
Our Final Take on Caterpillar Stock
CAT’s long-term demand prospects remain supported by increased infrastructure spending, clean energy demand and growth in data centers. Focus on growing service revenues should help it maintain an upbeat performance. The company is also returning value to shareholders through consistent dividend payments.
However, the stock’s premium valuation, declining sales volumes in key segments and downward earnings revisions suggest that new investors should exercise caution and consider waiting for a more favorable entry point. The stock currently carries a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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