Image source: Caterpillar.

Industrial giants Caterpillar (CAT -0.39%) and United Technologies (RTX 0.51%) have both played key roles in the success of the U.S. economy. Caterpillar's equipment has helped the construction industry build out the infrastructure that has served Americans for decades, and United Technologies' history in everything from heating and air conditioning systems and elevators to helicopters and aircraft components has made its products ubiquitous. However, both companies have seen their stocks under pressure, and smart value investors want to know which stock might be a better candidate for a turnaround. Let's look at Caterpillar and United Technologies using a variety of key metrics to see which one might be a more ideal pick for investors.

Valuation and stock performance

Neither Caterpillar nor United Technologies has been able to make much headway in terms of giving their shareholders a decent return over the past year. Caterpillar has fallen 1% since July 2015, and United Technologies lags just behind with a 2% loss.

From a valuation standpoint, it's always a bit difficult to compare cyclical stocks using earnings-based measures when the industry is in a downturn. In this case, however, United Technologies appears to have a much cheaper valuation than Caterpillar. When you look at trailing earnings over the past 12 months, United Technologies has a reasonable valuation of 12 times earnings, while Caterpillar's trailing earnings multiple is closer to 40.

Incorporating forward estimates narrows the gap somewhat, because Caterpillar is going through what many hope will be temporary issues, and United Technologies' earnings are expected to fall. Yet even taking that into account, United Tech's forward multiple of 15 is far less than Caterpillar's 22 forward P/E ratio. That's a wide enough difference to make United Technologies look like a better buy from a valuation standpoint.


On the other hand, dividend investors who prefer as much current income as they can get will take a liking to Caterpillar over United Technologies. The heavy-equipment specialist has a dividend yield of 4.1%, which easily tops the 2.6% yield that its conglomerate peer currently pays.

Image source: United Technologies.

Some investors point out that Caterpillar has been quite aggressive about sustaining its dividend payout, with the company currently paying out everything it has earned over the past 12 months plus 50% extra. By comparison, United Technologies' earnings payout ratio of just 57% is a lot more conservative, giving the conglomerate opportunities for future growth while retaining more flexibility.

Still, both companies have a long-term history of dividend growth. United Technologies raised its payout for the 23rd consecutive year earlier in 2016, but Caterpillar's streak remains at 22 years after having chosen not to boost its July payout as it has in past years. Because of its mid-year timing, Caterpillar could sustain its track record simply by keeping its dividend flat for the rest of 2016 and making an increase at some point in 2017. Overall, Caterpillar's higher yield is one key distinction between the two stocks, but both compare fairly closely.

Growth prospects and risk

Both Caterpillar and United Technologies have taken big hits from tough conditions in the industrial sector. Caterpillar's most recent quarter continued to show the company struggling. Year-over-year revenue dropped 26%, falling to just half their level from 2012 as weakness in energy, mining, construction, and transportation weighed on its results. Even the company's big buybacks weren't able to keep earnings per share from plunging by more than three-quarters, and declining backlogs point to difficult times ahead if customers don't start to order replacement equipment. Few expect any relief soon, and Caterpillar itself has said that its key energy and transportation segment could see sales drop by almost 15% in 2016. In addition, weakness in key geographical areas like Latin America has reversed what had been points of strength for the equipment-maker.

United Technologies is also going through some transitions. In its most recent quarter, the company reported a 1% rise in sales and a small 6% decline in earnings per share. Many expected more profitable results after the conglomerate sold off its Sikorsky unit drop last year, but a slow-growth macroeconomic environment held back many of the company's key segments. Strength in Pratt & Whitney's commercial aftermarket aerospace sales was offset by falling equipment orders at the UTC climate, controls, and security unit. Still, United Technologies has shown some progress in moving forward with cost-cutting initiatives, and investors hope that the conglomerate will produce at least modest organic sales growth this year.

Right now, United Technologies looks like the better buy for most investors, especially those looking for immediate results. Caterpillar has a much longer road to travel in order to recover fully. Eventually, the heavy-equipment manufacturer could have better prospects, but for now, United Technologies has the edge.