It's fair to say that 2020 has been a nightmare year for both Boeing (NYSE:BA)and Caterpillar (NYSE:CAT). The aerospace giant simply can't seem to catch a break. If it isn't the protracted process of getting a return-to-service authorization for the 737 MAX, it's the COVID-19 pandemic threatening a multiyear slump for the commercial aviation industry. Meanwhile, the heavy equipment powerhouse, which had been anticipating a sales recovery this year, has seen those hopes laid waste by the pandemic.

Both stocks have been sold off heavily -- Boeing has lost more than 60% of its value in 2020, and Caterpillar is down by about 30% year to date. Which looks like the better buy now?

Airplane passengers sitting in their seats on an airplane

Image source: Getty Images.

Let's start by laying out three key points.

  • Prior to the pandemic, Caterpillar was structured to deal with already weak end markets and Boeing was structured to deal with multiyear growth in aviation.
  • Caterpillar's sales growth largely relies on growth in the global economy; Boeing's commercial aviation markets are also impacted heavily by governments' actions.
  • Boeing's aircraft take years to develop and the long-term profitability of programs like the wide-body 787 and 777X aircraft might be impacted by a shift in the nature of demand from airlines.

Where they stood

A chart of Caterpillar's retail sales in the last few years shows it entered 2020 with sales in contraction. A previous slowdown in 2015-2016 had caused management to take the knife to its cost base and focus on growing recurring revenue from aftermarket sales. As such, management now expects the company will generate higher margins and free cash flow even through periods of economic decline.

Chart showing Caterpillar retail sales growth

Data source: Caterpillar. 

In contrast, Boeing's end markets were flying going into 2020. Airlines were enjoying a multiyear rise in profits, and commercial passenger growth remained solidly in the mid-single-digit percentage range.

The company had a large backlog of planes on order, and investors were hoping that the 737 MAX's return to service would lead to a ramp-up of production for the aircraft. Meanwhile, unit production costs were falling on the 787, implying a long-term boost to the profitability of the program. It's also important to note that increasing aircraft production is a key part of generating margin expansion for Boeing.

Boeing was also preparing for an anticipated replacement cycle for wide-body aircraft by developing the new 777X, and plans were underway for a new midsize airplane to fulfill an expected market need. 

In short, Boeing was geared for a lengthy expansion period in commercial aviation, but the COVID-19 pandemic has disrupted nearly all its previous assumptions and plans.

Chart showing worldwide airline profitability and passenger numbers

Data source: International Air Transport Association. RPK = revenue passenger kilometers, measures actual passenger traffic.

What's the outlook?

If you are worried about the global economy, neither stock looks like a buy. Commercial passenger travel trends tend to follow the trend of the economy, so that's not looking good for Boeing. Meanwhile, Caterpillar's end markets  -- namely construction, infrastructure, mining, oil and gas, power generation, and rail locomotives -- are also tied to macroeconomic conditions that have turned rocky.

However, the key difference in considering the outlooks for these two companies is that it's difficult to predict what governments will do with regard to travel restrictions, even if the pandemic at some point appears to be contained. In addition, heightened awareness about the dangers of potential viral outbreaks could increase governments' willingness to impose new travel restrictions. All this makes Boeing appear more risky.

While 737 order cancellations mount, it's highly likely that the COVID-19 pandemic is also going to, at the very least, skew orders for the 777X and the 787. In addition, it's possible that the impact of the pandemic on the commercial aviation industry will cause a shift in the type of airplanes that airlines want too and the 777X could turn into a white elephant.

Boeing or Caterpillar?

If I were choosing between these stocks, I'd say Caterpillar is the better option. The aviation market will surely recover, but it's not clear if Boeing is built to thrive in the kind of market that will be in place after the pandemic is contained.

Caterpillar also faces issues, but in dealing with the U.S. industrial recession of 2015-2016, its management has better prepared the company for hard times. Throw in a dividend the currently yields 3.7% and Caterpillar looks OK as an option for patient investors looking for income stocks.