Caterpillar's Unprecedented Growth Raises Questions About Its Sustainable Outlook
Caterpillar's stock has been a standout performer in the industrial sector, delivering a stunning +95% return over the last twelve months. However, when looking at the underlying business performance, Caterpillar ranks second on key metrics such as revenue growth and operating margin.
The company's 18.4% revenue growth is strong, but Deere, its rival, posts a slightly better operating margin of 17.6%. Despite this, investors have rewarded Caterpillar with a +95% return, far outpacing Deere's +50%. The market appears to be betting on a future where power generation and oil and gas demand will continue to drive growth.
Caterpillar's backlog has surged to $72 billion, giving the company unusual visibility into future sales. Some of this visibility extends for years, with management noting that customers are placing orders as far out as 2030. However, not all segments are performing equally well - Construction Industries faces a headwind due to changes in dealer inventory.
The test lies in whether power generation can outrun a construction slowdown and deliver on the company's own heightened expectations for mid- to high teens growth. If Caterpillar can hit this target, its premium price will be validated.