Shares of industrial equipment manufacturer Caterpillar (NYSE:CAT) soared to a new intraday all-time high of $176.37 per share on Monday as the market celebrated the effectiveness of the new coronavirus vaccine candidate from drugmakers Pfizer and BioNTech.

Hope for the widespread distribution of a successful vaccine is a strong tailwind for the broader markets, but it has particular benefits for Caterpillar. Here's why.

Gloved hand holds syringe labeled Covid-19 vaccination

Image source: Getty Images.

The anatomy of an industrial bellwether

As one of the largest global industrial companies and a staple of the Dow Jones Industrial Average, Caterpillar is often regarded as the quintessential bellwether industrial stock. All three of its business segments -- energy and transportation, construction, and resource industries (like mining) -- boom and bust with the economy. And although fewer than half of Caterpillar's sales are in the U.S., it's still the backbone of its business. 

Caterpillar's performance is suffering greatly from the pandemic

Just as a booming American economy is a recipe for success, a crippled one is sure to stymie Caterpillar's performance -- which is exactly what has happened.

During the pandemic's peak in the second quarter, all of Caterpillar's segments were hurting, suffering some of the worst revenue and profit declines in years. As the economy reopened, Caterpillar's earnings improved, and it reported much better results in the third quarter.

Segment

Q3 Year-Over-Year Change

Q2 Year-Over-Year Change

Energy and transportation

(24%)

(24%)

Construction industries

(23%)

(37%)

Resource industries

(21%)

(35%)

Total

(23%)

(31%)

Data Source: Caterpillar Inc. 

Third-quarter revenue declined 23% and profits declined 54%, but it was an improvement from a 31% revenue decline and a 70% profit decline in the second quarter. 

Digging deeper into the numbers, it's worth noting that Asia/Pacific and Europe, Africa, and Middle East (EAME) sales were only down 8% and 14% respectively. Together, Asia/Pacific and EAME sales are a bigger market and are growing faster than North America, comprising 49% of the company's third-quarter revenue. Its construction business, which improved substantially in the third quarter, notched 14% higher sales in Asia/Pacific. Asia/Pacific now has positive YoY growth thanks to strength from China. In sum, Caterpillar's business outside of the Americas has successfully rebounded from its pandemic lows, indicating that North America could follow after widespread implementation of a vaccine.

Caterpillar's energy business could get a boost

Although Caterpillar is typically associated with its bright yellow bulldozers and excavators, its energy and transportation business is actually its largest segment by revenue. Unfortunately for Caterpillar, a global slowdown has reduced demand for natural gas and crude oil, which reduces the incentive for many of Caterpillar's end users to buy equipment.

Caterpillar manufactures engines for power generation, marine transportation, and various oilfield activities like gas compression, well service, and drilling. And when people simply aren't using as much oil and gas, there's less incentive for Caterpillar's customers to buy its new equipment.

However, a COVID-19 vaccine would mean a gradual return to higher oil and gas consumption as people take vacations, commute to work, or visit friends -- and businesses use more fuel for industrial applications. A vaccine would also validate Caterpillar's agreement to acquire Weir Oil & Gas.

Announced in October, the $405 million all-cash deal seems to be a well-timed acquisition. It was made during a time when many oil and gas companies were willing to sell but few were willing to buy, allowing bigger players like Caterpillar to snag assets on the cheap. Caterpillar CEO Jim Umpleby elaborated on the details of the deal in the company's third-quarter earnings call, noting that Weir:

...comes with a strong services business and would expand our product portfolio, one of the broadest in the well service industry...we view this as an opportunistic time to strengthen our lineup of oil and gas products and services, and importantly, we believe the transaction economics will prove attractive even if oil prices remain low.

Improving the balance sheet

After increasing leverage by taking on more debt and suspending share buybacks, Caterpillar began improving its balance sheet in the third quarter. Even with the improvement, financial metrics like debt to equity, debt to capital, and total net long-term debt are near three-year highs.

CAT Chart

CAT data by YCharts

A vaccine could lead to higher profits and a return to strong free cash flow (FCF), which Caterpillar can use to get its balance sheet back to where it needs to be.

In addition to improving its balance sheet, Caterpillar could use excess cash to continue its 26-year streak of raising its dividend, which has earned it a spot on the coveted list of Dividend Aristocrats. Caterpillar yields 2.5% at the time of this writing.

Big-time benefits, expensive valuation

Few industrial companies would benefit more from a COVID-19 vaccine than Caterpillar. Caterpillar's business as a whole has rebounded nicely, but its North American segment continues to struggle. Although a vaccine could send Caterpillar to new all-time highs with time, the market seems to be valuing this "if" as a certainty. Caterpillar remains an excellent buy over the long term, so picking up some shares even at today's prices isn't the worst idea, but there's no reason to rush into the stock right now.