CAT Stock Valuation Multiple Rests On Rising Margins

Caterpillar's stock has risen significantly over the past year, but its valuation multiple remains high. The company's stock price is currently around $855 per share and trades at a multiple of 37.8 times its adjusted earnings over the last twelve months.

The defense for this valuation is that earnings are expected to grow into it, with consensus estimates showing growth of 7.9% annually through 2027. However, analysts' expectations for revenue growth are lower than the actual results seen in the past year, at around 18.4%. The key assumption here is that margins will continue to rise.

The company's backlog stands at $72 billion, which is close to a full year of revenue booked over the trailing twelve months. However, only 59% of this backlog is expected to be delivered within the next twelve months. Consensus estimates do not take into account the full value of this backlog, and instead focus on the company's ability to maintain its margins.

Caterpillar's operating margin currently stands at 17.5%, which is below the three-year average of 18.7%. However, management has flagged accelerated depreciation on new capacity as a factor that will drag on Power & Energy margins for several years.