When you contemplate the best-performing Dow stocks for investment, Apple (NASDAQ:AAPL) might be the first name that comes to mind. After all, it’s the world’s most valuable company, favored by legendary investor Warren Buffett, and a pioneer in consumer technology. However, what if we told you there’s another Dow Jones Industrial Average ($DOWI) component that has consistently outperformed Apple across various timeframes, and surprisingly, it’s not even a tech stock?
That stock is none other than Caterpillar (NYSE:CAT), the world’s largest manufacturer of construction and mining equipment, a true stalwart in the industrial sector. While CAT hasn’t achieved gains on the scale of tech giants in 2023, it’s worth examining its performance from different angles to gauge its true technical prowess.
CAT’s Long-Term Technical Supremacy
Admittedly, when looking at the year-to-date performance, Apple has comfortably outpaced CAT. However, it’s essential to remember that Apple and other tech stocks had substantial room for recovery after a challenging finish to 2022.
Over the past 52 weeks, Caterpillar stock has surged by nearly 60%, while AAPL has only managed a 20% increase. To provide perspective, the broader Dow has risen by approximately 10% during this same period.
More recently, focusing on the last three months, AAPL’s impressive momentum from the first half of 2023 has slowed significantly, with shares yielding a return of less than 5% during this timeframe. In contrast, CAT has gained more than 25%, partly fueled by well-received Q2 earnings. Apple, on the other hand, missed iPhone sales estimates in its latest quarterly report.
With CAT clearly holding its ground against this tech powerhouse in terms of stock performance, let’s delve into the fundamentals.
CAT’s Earnings Exceed Expectations
In its second-quarter earnings report, CAT reported revenue of $14.4 billion, marking a remarkable 29% surge compared to the previous year. Earnings per share also exceeded expectations, rising by 74% year-over-year to reach $5.55. Notably, both figures outperformed analysts’ projections, which had estimated revenue at $13.9 billion and earnings per share at $4.51. Additionally, Caterpillar raised its full-year revenue and earnings guidance, and the stock led Dow gainers with an impressive rally of more than 8% after the report.
CAT attributed these stellar results to a global increase in infrastructure spending and investment. This surge in demand extended across all segments, with its construction, resource, energy, and transportation divisions all posting significant growth. The construction segment reported a remarkable 45% revenue increase, buoyed by higher sales volume and the introduction of new products such as the electric mini-excavator and autonomous dozer. Simultaneously, the resource segment saw revenue rise by 41%, driven by elevated sales volume in mining and expansion into emerging markets like lithium and rare earths. Furthermore, the energy and transportation segment contributed 16% revenue growth, propelled by increased sales volume and innovative solutions in areas such as power generation and hydrogen development in collaboration with Chevron (CVX).
Delving deeper into the report, the company’s operating margin climbed from 15.3% to 17.5%, while the net income margin increased from 10.7% to 12.4%. In terms of financial strength, CAT generated $2.8 billion in operating cash flow and $2.1 billion in free cash flow during the quarter. This enabled the company to increase its dividend by 10% and repurchase $1.2 billion worth of its own shares, demonstrating its commitment to rewarding shareholders.
Overall, Caterpillar’s recent performance illustrates that the company is benefiting from the global economic recovery and its own operational excellence. The company’s robust sales and revenue growth, strategic collaboration with Luck Stone, and commitment to a reduced-carbon future underscore its continued leadership in the industrial sector.
Analysts Expectations for Caterpillar Stock
Looking ahead to CAT’s future, analysts hold a positive outlook for earnings growth. Fiscal 2023 earnings are expected to improve by an impressive 43.1% compared to 2022. The average earnings estimate for the full year stands at $19.81 per share, derived from 11 estimates. These projections range from a high estimate of $20.86 per share to a low estimate of $18.50 per share. For fiscal year 2024, earnings growth is expected to moderate to 6.8%.
Based on recommendations from 19 analysts, CAT holds a consensus rating of “moderate-buy.” Specifically, 7 analysts recommend a “strong buy,” 1 suggests a “moderate buy,” 9 recommend a “hold,” and 2 indicate a “strong sell.” This collective sentiment reflects the overall optimism surrounding Caterpillar stock on Wall Street.
It’s noteworthy that CAT is currently trading above the average 12-month price target of $280.65, suggesting that the shares have exceeded some analysts’ expectations. However, the Street’s highest target of $350 implies an expected upside of nearly 23% from current levels.
Putting CAT’s Valuation in Perspective
Compared to its industrial peers, CAT’s performance and fundamentals stand out. With a market capitalization of $143.4 billion, it ranks among the largest industrial companies in the U.S., alongside well-known names like General Electric (GE), another surprising outperformer with GE shares up by 100% in the last 52 weeks.
At present levels, CAT appears reasonably priced. The stock’s price-to-earnings ratio of 15.45 is lower than the sector median of 17.58, indicating that it may be somewhat undervalued. Additionally, CAT’s price-to-sales ratio of 2.36, price-to-cash flow ratio of 13.43, price-to-book ratio of 7.62, and earnings per share of $18.27 all look attractive relative to comparable industry-wide metrics.
With an above-average dividend yield of 1.74% and a prudent dividend payout ratio of 26.05% (below the sector average), CAT’s balanced approach to rewarding shareholders bodes well for future growth.
Is Caterpillar the Top Dow Stock to Consider?
While Caterpillar may never replace or compete with Apple, its consistent outperformance merits recognition from investors. As we enter the historically challenging month of September, this operationally resilient industrial giant appears to be a top Dow stock to consider, especially if Apple and its FAANG cohort face headwinds from another wave of risk-off sentiment.
Featured Image: Megapixl
