Can you dig it? Constructing a bull case for Caterpillar stock

Large-cap construction and mining equipment seller Caterpillar (NYSE: CAT) was largely ignored last year as Wall Street remained hyper-focused on the Magnificent Seven tech stocks. However, Caterpillar stock is jumping today, and the company is finally getting some well-deserved attention.

Many years ago, commentators would say that General Electric’s (NYSE: GE) financial performance was a good gauge for the overall health of the U.S. economy. Now fast-forward to the 2020s, and Caterpillar might be considered the best gauge.

After all, if businesses aren’t buying construction equipment, then it probably means homes, offices and shopping centers aren’t being built. Let’s dig into Caterpillar’s recently released financials and see if there are any broader implications for America’s economy.

A big move for Caterpillar stock

Caterpillar stock gapped up 5% this morning following a nearly 2.5% gain on Friday. This is a big move for a $400+ stock that isn’t known for volatility.

Thus, it looks like the market is ready to rotate into a steady-Eddie stock like CAT stock. This should be a welcome development for investors who have had enough of the Magnificent Seven doing all the heavy lifting.

It’s also a signal that the U.S. economy is on the mend — even if interest rates are still elevated.

“This stock has really become a barometer for not just the industrial economy but the global economy writ large; it has also been more resilient than expected,” explained Kristen Owen, executive director at Oppenheimer & Co. Inc.

On a global scale, there’s a mix of good news and bad news from Caterpillar. The company’s North American sales grew 4% year over year in the fourth quarter. However, its sales in the Asia-Pacific region declined 5%.

China’s distressed real-estate market is a likely contributing factor to this disparity. Furthermore, the U.S. government committed large-scale funding to upgrading the nation’s infrastructure, so this may have had a positive impact in North America.

A particular area of strength for Caterpillar in Q4 was its Energy & Transportation’s segment. This unit’s profit grew 21% year over year to $1.429 billion. Caterpillar attributes this to “favorable price realization and higher sales volume.”

Most likely, “favorable price realization” is a fancy way of saying that Caterpillar raised the prices of its equipment in the Energy & Transportation’s segment, and evidently businesses were willing to pay more for this equipment. Meanwhile, “higher sales volume” speaks for itself and is a positive sign for Caterpillar and perhaps the economy as a whole.

Caterpillar impresses with profit and margin

Caterpillar’s Q4 2023 total sales of $17.1 billion represents a 3% improvement over its $16.1 billion in sales from the year-earlier quarter. Moreover, this result is in line with the $17.1 billion that Wall Street had expected.

In other words, Caterpillar’s overall top-line result was fine but not a blockbuster beat. As a result, the market’s sudden enthusiasm for CAT stock certainly isn’t due to the company’s in-line quarterly sales.

What’s more impressive is Caterpillar’s ability to keep its operating costs under control during a time of declining but still-high inflation. In the fourth quarter, Caterpillar reported $13.936 billion in total operating costs, versus $14.917 billion in the year-earlier quarter.

Caterpillar’s cost containment can help to explain its eye-popping growth in operating profits. Specifically, the company’s operating profit came fairly close to doubling as it grew from $1.68 billion in the year-earlier quarter to $3.134 billion in Q4 2023. This doesn’t necessarily say much about America’s economy in general, but it’s a sign that Caterpillar is on the right track.

Now turning to the bottom line, Caterpillar earned $5.23 per share in the fourth quarter. This represents a huge improvement over the $3.86 per share the company earned in the year-earlier quarter. Additionally, this result beat Wall Street’s consensus earnings estimate of $4.76 per share.

Finally, I must point to Caterpillar’s improving operating profit margin. This circles back to the concept of cost containment. As it turns out, Caterpillar’s operating profit margin for the fourth quarter was 18.4%, which is much better than the 10.1% it reported in Q4 of 2022.

Therefore, in certain respects, Caterpillar is as magnificent as any Magnificent-Seven company. It’s nice to see the market finally paying attention to the company, even if it’s just for a day or two. Thus, feel free to pick up a few CAT stock shares as they’re likely to gain significant value if America’s economy stays on an even keel in 2024.