In 2024, the U.S. infrastructure landscape is overdue for a revival, with 44% of the nation’s bridges and 32% of urban roads demanding urgent repairs. With over $1 trillion in federal funds already earmarked for the effort, domestic demand for heavy machinery looks set to ramp higher. Elsewhere, China's aggressive stimulus package is not just breathing new life into its stock market; it’s also benefiting U.S. companies with ties to the massive Asian economy.

With its global presence, heavy machinery specialist Caterpillar Inc. (CAT) is well-positioned to capitalize on China's economic push. Moreover, Jefferies is upbeat on CAT stock, anticipating earnings growth from recovery in the energy and materials sectors, along with rising demand for green energy minerals. 

With Caterpillar already outperforming the broader market this year - and trading above Wall Street’s average target price - is CAT still a good buy, or have investors missed the boat on this dividend-paying stock? Let’s take a closer look. 

About Caterpillar Stock

Caterpillar Inc. (CAT) has been a powerhouse in heavy machinery since 1925. The company manufactures and sells construction and mining equipment, ranging from asphalt pavers to mining trucks and diesel-electric locomotives.

The company’s operations span multiple segments, including construction, resource industries, energy and transportation, and financial products, delivering holistic solutions and services to power industries across the globe. CAT’s market cap currently stands at $194.2 billion.

Caterpillar shares have surged 49.7% over the past 52 weeks, outpacing the S&P 500 Index's ($SPX) 32.2% returns and the Industrial Select Sector SPDR Fund’s (XLI) 34.1% gains over the same time frame.

In recent weeks, the stock’s positive momentum accelerated on news of China's massive stimulus plan, which has given Caterpillar a fresh boost. The stock reached an all-time high of $401.17 earlier in today’s trading, and is up more than 34% YTD.

However, the shares appear to be short-term overbought, indicating a pullback could be possible  - which would provide an ideal opportunity to pick up CAT on the dip.

In terms of valuation, Caterpillar stock trades at 17.96 times forward earnings, which is lower than the industry average and its own five-year average of 18.54x.

Caterpillar has been paying dividends since 1933, and - with an impressive streak of over 30 years of consecutive growth - has secured its spot in the elite S&P 500 Dividend Aristocrats Index.

On Aug. 20, CAT distributed a quarterly dividend of $1.41 per share. The current payout results in an annualized dividend of $5.64, and a 1.42% yield. The board also greenlit a $20 billion increase in its share repurchase authorization, bringing the total to $21.8 billion. 

Going forward, CAT’s policy is to return substantially all Machinery, Energy & Transportation (ME&T) free cash flow to shareholders over time through dividends and share repurchases.

Caterpillar Climbs on Q2 Beat

Shares of Caterpillar rose 3% after its better-than-projected Q2 earnings on Aug. 6. Revenue of $16.69 billion barely edged out Wall Street's forecast, while adjusted EPS rose 7.9% to $5.99, which came in 8.3% above estimates. 

The uptick in the bottom line came from favorable pricing and manufacturing efficiencies, alongside a surge in profits from the Energy & Transportation segment, which notched a 20% operating profit increase to $1.52 billion. Despite volume declines due to shifting dealer inventories, the ME&T segment’s operating profit rose 3% to $3.66 billion. Caterpillar generated $2.5 billion in ME&T free cash flow in Q2.

Caterpillar's backlog swelled to $28.6 billion during the quarter, reflecting robust demand for solar turbines and power generation engines. Operating cash flow rose to $5.1 billion in the first half of 2024, up from $4.8 billion a year earlier, while its cash balance landed at $4.3 billion. 

Management projects 2024 revenues arriving slightly below its record $67 billion in 2023. However, the company projects stronger adjusted operating profit margins, aiming for a 16% to 20% range on revenues of around $64.5 billion. With operating profit and EPS expected to exceed previous targets, Caterpillar’s ME&T FCF could hit the top end of the targeted range of $7.5 billion to $10 billion.

Analysts tracking Caterpillar project the company’s profit to reach $21.91 per share in fiscal 2024, up 3.3% year over year, and grow another 4.7% to $22.93 in fiscal 2025.

China’s Stimulus Fuels Caterpillar’s Surge

In late September, the People’s Bank of China (PBOC) launched a stimulus blitz to stabilize the economy and invigorate markets.

This aggressive approach included significant cuts to the reverse repo rate, reserve requirement ratios, and mortgage rates, all designed to boost consumption and reinvigorate multiple sectors, especially energy and mining. 

Caterpillar has a diverse geographical reach, with nearly half of its Q2 sales stemming from international markets, including a substantial 17.5% from Asia Pacific (led by China). The stimulus could be a game-changer for Caterpillar, especially in its mining segment, which has faced challenges.

As the materials sector rallies, driven by rising demand from China, Caterpillar stands to gain, especially in a landscape where its machinery is crucial for resource extraction. 

What Do Analysts Expect for Caterpillar Stock?

Brokerage firm Jefferies recently raised its price target on CAT from $430 to $455, marking a new Street-high. The firm projects a significant earnings boost as Caterpillar’s energy and mining segments recover from “trough levels.”

“Anecdotally, equipment fleets are very old, and electrification and automation should provide additional tailwinds,” commented analyst Stephen Volkmann.

Caterpillar has a consensus “Moderate Buy” rating overall. Of the 21 analysts covering the stock, seven advise a “Strong Buy,” one suggests a “Moderate Buy,” 11 maintain a “Hold,” and two recommend a “Strong Sell.”

Outperforming CAT trades at a premium to its mean price target of $359.11, while Jefferies sees the stock rising up to 14.2% from here.

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On the date of publication, Sristi Suman Jayaswal did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.