Caterpillar Stocks Hit New Highs; Is it time to ring the register?

Caterpillar stock price

Key points

  • Caterpillar has peaked and may correct lower, but this is a buying opportunity on a dip.
  • Strength in critical segments and end-market normalization in others sets the company up for growth later in the year.
  • Analysts favor the stock and support the price action; the new target high was set after release and would be a new all-time high.
  • 5 stocks we prefer to Caterpillar

caterpillar NYSE:CAT shares rose more than 5% after release in the fourth quarter, extending the 2023 rally to 100% and gains from 2020 lows to 250%, creating an attractive selling opportunity. While taking profits is never a bad thing, investors should think carefully before closing the entire position. Caterpillar’s post-release price action suggests a top, but other factors are at play. Among these are analysts.

Analysts hold Caterpillar stock and support the market with upward price target revisions. The consensus target delays market progress and could pose a headwind in the short term, but the trend remains positive. tracks a new review within the first 24 hours of release, which is conducive to the trend. TD Cowen maintained an Outperform rating and raised its price target to $338, setting a new high. This target is only 5% higher than current action, but is well into new elevated territory.

Caterpillar creates leverage for earnings growth

Caterpillar had a mixed quarter, but only when it came to analyst estimates. Revenue of $17.1 billion fell short of’s consensus figure, but was up 3%, and the result was minimal. Revenue increases were driven by prices offset by a slight decline in volumes which is more positive than not for businesses.

The decline in volumes is associated with a reduction in dealer inventories which sets the company up for improved sales later in the year, with better price realization in the mix. The company’s diversified offering also played a role, with weakness in the construction and resources sectors offset by a 12% increase in the energy sector and a 15% increase in financial revenues. As the oil industry is still in the first half of a major spending cycle, the energy segment will likely continue to be strong into 2024 and 2025.

Margin news is also supportive of the long-term stock price trajectory. The company improved its GAAP and adjusted operating margins, GAAP by 830 basis points and 190 adjusted, to increase profit leverage. Adjusted earnings grew 35% on revenue growth of 3%, with margin strength expected to persist into the current fiscal year.

The company did not provide specific guidance for the year, but believes 2024 will be largely similar to 2023 with the addition of better margins. The company raised its margin target range by 100 basis points and sees 2024 margin in the upper half. Analyst consensus prior to the release was for 1% revenue growth with a contraction in earnings; The industrial sector is expected to post double-digit earnings growth in 2024, and Caterpillar is the largest holding.

Caterpillar’s capital returns will remain strong in 2024

Among the attractions for Caterpillar stock are the company’s capital returns. The company generated $12.9 billion in operating cash flow in 2023 and returned more than $7 billion to shareholders. Capital returns included $5 billion in buybacks and $2.6 billion in dividends for an effective yield close to 5%. The dividend yield is worth about 1.6% to investors, and the payout is growing. Caterpillar is a dividend aristocrat on track to deliver its 31st increase this year. The next increase is expected for mid-year and should be around 7.5%. The buybacks are worth around 3.2% of the market capitalization included in the report and the share drops by almost 2.7% on an annual basis.

The technical point of view: Caterpillar peaks. Shop on the dive

Caterpillar peaked after its fourth-quarter release, but the upward price trend is unlikely to end. The stock trades at reasonable earnings of 16X, in line with the S&P 500 Index, and has prospects for margin improvement, earnings growth and robust capital returns. The market may support the stock at the previous week’s high near $300, but more solid support levels are found at $300 and $275.

Caterpillar stock price

Before you consider Caterpillar, you’ll want to hear this.

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