2 Reasons to Like CAT and 1 to Stay Skeptical

Caterpillar trades at $829.00 per share and has stayed right on track with the overall market, gaining 11.6% over the last six months. At the same time, the S&P 500 has returned 11.7%.

Is CAT a buy right now? Find out in our full research report, it’s free.

Why Does Caterpillar Spark Debate?

With its iconic yellow machinery working on construction sites, Caterpillar (NYSE:CAT) manufactures construction equipment like bulldozers, excavators, and parts and maintenance services.

Two Things to Like:

1. Long-Term Revenue Growth Shows Strong Momentum

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, Caterpillar’s 10.2% annualized revenue growth over the last five years was solid. Its growth beat the average industrials company and shows its offerings resonate with customers.

2. Increasing Free Cash Flow Margin Juices Financials

Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Caterpillar’s margin expanded by 6.6 percentage points over the last five years. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability. Caterpillar’s free cash flow margin for the trailing 12 months was 14.2%.

One Reason to Be Careful:

New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

Over the last few years, Caterpillar’s ROIC has unfortunately decreased. Only time will tell if its new bets can bear fruit and potentially reverse the trend.

Final Judgment

Caterpillar’s positive characteristics outweigh the negatives. At $829.00 per share (or 28.2× forward P/E), is now the right time to buy the stock? See for yourself in our comprehensive research report, it’s free.

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