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Why Is Everyone Talking About Caterpillar Stock?

industrials Nov 30, 2022

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Current Price: $231

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Stock: Caterpillar ($CAT)

While retail is slowly recovering and big tech is in the wilderness, Industrial stocks have weathered this downturn relatively well.

One of the stand-out examples of that is Caterpillar -- who has choppily gained 12% in their market cap in the past year.

CAT is actually an old-school pick from the Moby Analyst team, cruising past our initial 2021 price target of $160 ages ago. And now, we're in an entirely different territory because the stock is comfortably pushing past $235/share. 

You may be surprised at this but despite the fact that costs are up, folks are still building.

And Caterpillar is powering a huge chunk of that construction without letting supply chains get in their way.

Their high-price point and backlog are allowing them to offset supply costs and stay profitable no matter how hard the Fed tries to push us into a recession. On top of that, some of their most exciting sectors are finding ways to expand their profitability. 

There's a lot to build towards in this one, so let's get into the details👇


Caterpillar Overview:

CAT is up 19% this year on the back of revenue beat after revenue beat.

Their operating profit is up 46% year-over-year on the back of streamlining efforts made by the company.

CAT obviously produces their iconic bulldozers, excavators, and other construction equipment, but they also have a burgeoning Resource Extraction vertical as well as a solid Energy & Transporation arm that are the big contributors to Caterpillar's overall profit. 

The short of it is, Caterpillar has increased profitiability by leveraging an immense backlog to streamline costs and lock-in high-profile deals that give them a lot of room to work with. 

Caterpillar's revenue for Q3 this year was $15 billion while their backlog of deals they're still working through is a staggering $30 Billion.

And the crazy thing is that this upside still hasn't be priced in by the markets yet.

They have 5 months of revenue basically locked up already -- they just need to execute on it.

That long of a look has allowed Caterpillar to plan production way better and keep supply chain costs under control. 

The main reason we're excited is because Q4 cyclically is actually the biggest year for construction/ industrial stocks like Caterpillar. Their backlog is only going to expand from here with Q4 guidance looking solid.

This is a prime example of a company with low-hanging opportunities, that are being overlooked by other investors.


Expanding Profitability:

Every piece of the CAT empire has been impressive in how their investments have paid off, leading to increased profits.

The biggest highlight here is CAT's resource industry vertical.

Gross profit for resources doubled YoY to $506 million -- accounting for 1/5th of all of Caterpillar's gross profit all on its own.

As material costs spike worldwide, resource extraction becomes more and more profitable for Caterpillar, offsetting CAT's own manufacturing expenses. 

Meanwhile, Energy & Transportation managed to pull off a 32% increase in profit on the back of high sales volume in their oil & gas vertical.

Once again, even though CAT is getting hit with supply chain inefficiencies and higher manufacturing expenses, their industry is in such high demand that they can pass a good chunk of those costs on to their customers without impacting their backlog. 

That's what makes this downturn so hard to parse sometimes -- even though everything is more expensive, there is still a massive need to keep building and maintaining economic output worldwide.

CAT is strategically positioned in its 3 main verticals to stay competitive even as more players start gobbling up this ever-expanding demand.


Caterpillar Outlook:

And this is a big part of why Caterpillar is a fairly strong proof of our chief philosophy here at 

Boring is Beautiful.

While the rest of the market faces a LOT of volatility as the big tech firms report earnings and set the tone of this bear market -- Caterpillar is chipping away at a MASSIVE backlog that's allowing them to plan costs in a way that they can stay profitable. 

Like most of the stocks that are doing well right now, CAT isn't the sexiest pick in the world, but it's a solid defensive ballast for your portfolio, especially with its 2.04% dividend to keep things positive regardless of how the rest of the market turns.

In a time of turmoil, value plays like this have outperformed massively in 2022.

Rating: Overweight

Market Cap: $120B

Dividend Yield: 2.04%