Industrial giants Boeing (BA 1.63%) and Caterpillar (CAT -1.11%) are set for improving fortunes in the coming years. Both have major end market catalysts that are set to drive earnings growth. Let's take a closer look at what they are and which stock is the better buy right now. 

Air passengers

Image source: Getty Images.

The case for Boeing

In five years, Boeing will almost certainly be in a better place than it is today. Then again, its situation could hardly get much worse than it has been in the aftermath of the years-long grounding of its 737 MAX and the devastating impact of the pandemic on commercial air travel. Few images can sum up the company's last two years better than a chart of the net airplane orders for its narrowbody 737 MAX.

Boeing 737 MAX orders

Data source: Boeing presentations. Chart by author.

Increasing airplane orders lead to accelerations in production, which in turn leads to margin expansions and profit growth. That's the simple formula upon which Boeing's prospects are founded. The company also has a large defense business, and its global services business's earnings will start to grow again as commercial air travel returns. Still, as you can see below, the major swing factor when it comes to its bottom line has been its commercial airplanes segment.

Boeing segment earnings

Data source: Boeing presentations. Chart by author.

Orders for the 737 MAX will surely improve, but the critical question is what kind of discounts the company will have to offer to attract customers. Will the Airbus A320 NEO win market share away from the 737 MAX in the coming years?

Also, the pandemic has pushed the airline industry's anticipated widebody replacement cycle further out into the future. Boeing's management previously anticipated that the buying cycle would start in 2020 or so. That's bad timing for its new 777X. Simply put, Boeing faces some potential headwinds that could impair its ability to recover as strongly as many hope it will.

The case for Caterpillar

The heavy equipment giant is one of the most intriguing stocks in the market. Caterpillar's share price is up by around 30% year to date, mainly driven by an economic recovery that is stimulating increased demand for its construction equipment.

Retail sales of Caterpillar's machinery returned to year-over-year growth in the first quarter, led by rising sales of construction equipment.

Caterpillar retail sales

Data source: Caterpillar presentations. YOY = year over year. Chart by author.

The exciting part of the investment case for Caterpillar comes from the potential for a multiyear improvement in its resource industries sales, powered by rising mining commodity prices and increased infrastructure spending. In addition, Caterpillar's energy and transportation segment has exposure to capital equipment budgets in the oil and natural gas sector -- and the companies in it are likely to boost their capital outlays if the price of crude oil continues to rise.

As such, Caterpillar has the potential for significantly higher earnings in the coming years, and the stock is a valuable option for investors worried about the potential for raw material prices to increase over a multiyear time frame.

Boeing or Caterpillar?

The comparison between these two companies makes for a fascinating contrast. On the one hand, there's little doubt that Boeing's end markets will improve in the future. The question marks around the company relate to its ability to execute. Also, based on its previous earnings and cash flow, Boeing's stock is attractively valued today. For example, Boeing generated $13.7 billion in free cash flow in 2018 (equivalent to more than 10% of its current $133 billion market cap). If it can recover to something close to that figure over the next few years, it will be (at current share prices) an excellent value.

A pipeline in construction.

Image source: Getty Images

On the other hand, there's far more certainty around Caterpillar's ability to execute within its end markets. The question is whether those end markets will enjoy a multiyear recovery or not. Moreover, going back to the company's 2019 investor day presentation, management outlined expectations for $4 billion to $8 billion in FCF through the cycle. The high end of the range represents 6.1% of its current market cap of $131 billion, while the midpoint represents 4.5%.

In short, Caterpillar looks fairly priced, but if you think the prices of mining commodities will continue to increase, then the stock is a buy. Meanwhile, the case for Boeing rests on whether you believe in its ability to execute -- and that's an area where the company has come up short in recent years.

On balance, until and unless Boeing shows it can gain some momentum on 737 MSX orders, Caterpillar looks like a better investment right, but not by much.