Caterpillar’s stock price has moved into a technical correction after falling by 12% from its highest level this year. It fell to $367, and is hovering at its lowest level since September. Still, its stock has done well in the past few years, surging by over 365% from its lowest level during the pandemic.
Is CAT a good buy?
Caterpillar, the giant industrial giant, has done well in the past few years as governments have continued to boost their infrastructure spending. Its annual revenue rose from over $50 billion in 2019 to over $67 billion in 2023.
There are signs, however, that the company’s growth is slowing as some key countries like the United States, China, and in Europe slow down. It has also been affected by the rising competition from other industrial giants and supply chain challenges.
The company’s most recent results showed that revenue dropped by 4% in the third quarter. Operating profit declined by 9% to $3.1 billion, while adjusted profit and profit per share fell by 8% and 7%, respectively.
Caterpillar’s revenue dropped mainly due to weak performance in the construction industry. Volume in key regions like North America, Europe, and Asia also dropped. The division’s revenue dropped by 9%, while its profit fell by 20% to $361 million.
The construction sector may continue decelerating in 2025 if Donald Trump succeeds with his mass deportation pledge. In it, the president wants to deport millions of undocumented migrants, a move that will negatively impact the industry.
The resource segment also continued deteriorating. Its sales dropped to $3 billion in the third quarter from $3.4 billion last year as key commodity prices dropped. Key commodities like coal, copper, and steel continued falling. Its segment profit dropped by 15% to $111 million.
These declines were offset by an improvement in the energy and, transportation, and financial products whose revenues rose to $7.2 billion and $1.03 billion, respectively.
Valuation and dividends
Analysts expect the business to continue slowing in the next few years. In the last financial results, management estimated that sales would be lower than previous estimates.
The average annual revenue estimate will be $64.60 billion, down by 3.68% from a year ago. Revenue is then expected to grow to $65.42 billion in the next financial year.
The company has also become relatively undervalued as its forward price-to-earnings ratio moved to 17.3, lower than the sector median of 23. Its non-GAAP PE ratio of 16.8 is also lower than the sector median of 20.19.
Caterpillar is also a leading dividend payer, with a dividend payout ratio of 24.65% and a ratio of 1.53%. It is also a leading dividend aristocrat, having boosted its payouts in the last 31 years.
Caterpillar stock price analysis
The daily chart shows that the CAT share price peaked at $418 in November and then fell sharply after its earnings, as we predicted. It has moved below the 50-day and 100-day Exponential Moving Averages (EMA).
The stock has formed an ascending channel and is now along its lower side. It has also moved slightly above the 23.6% Fibonacci Retracement level.
Therefore, the stock’s outlook is neutral with a bearish bias since it has formed a head and shoulders pattern. More downside will be confirmed if it crashes below the lower side of this channel. If that happens, the next level to watch will be the 50% retracement at $285, which is about 22% below the current level.
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