Caterpillar has been on fire lately. In the past six months alone, the company’s stock price has rocketed 58.6%, reaching $933.99 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Following the strength, is CAT a buy right now? Or is the market overestimating its value? Find out in our full research report, it’s free.
Why Does CAT Stock 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 Positive Attributes:
1. 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 4.9 percentage points over the last five years. This shows the company is heading in the right direction, 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 12.9%.
2. Stellar ROIC Showcases Lucrative Growth Opportunities
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Caterpillar’s five-year average ROIC was 36.6%, placing it among the best industrials companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.
One Reason to Be Careful:
Lackluster Revenue Growth
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Caterpillar’s recent performance shows its demand has slowed as its annualized revenue growth of 2.8% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs. 
Final Judgment
Caterpillar’s merits more than compensate for its flaws, and with the recent rally, the stock trades at 35.9× forward P/E (or $933.99 per share). Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
Stocks We Like Even More Than Caterpillar
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