A member of the Dow Jones Industrial Average isn't likely to make investors rich in a hurry. That said, a few of them, namely Boeing (BA -2.87%), Chevron (CVX 0.44%), and Caterpillar (CAT 0.07%), have the potential for long-term price appreciation that could leave their current prices looking like a bargain. Here's why.
Boeing's self-help story
With its only major global competition coming from Airbus, Boeing has the market position to flourish. In addition, with an end-of-year 2022 backlog of 3,653 Boeing 737s, 505 Boeing 787s, and 244 Boeing 777Xs, the aerospace giant has a multi-year backlog to fill for airlines.
Boeing also has a plan to reach $10 billion in free cash flow (FCF) at some point between 2025 and 2026. Provided Boeing's current market cap of $126 billion stays the same, this implies a price-to-FCF multiple of just 12.6 times 2025 FCF -- a highly attractive valuation for a company with such a strong market position.
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However, Boeing doesn't have a recent history of execution that gives investors overwhelming confidence in its plans. Its defense programs have suffered multibillion-dollar cost overruns, and the 737 MAX grounding damaged its reputation. Moreover, Boeing has $36.8 billion in net debt to pay off.
Still, the company has every opportunity to improve matters by quietly executing its plan, and doing so could lead to a multi-year expansion in the stock price. Throw in the derisking of its fixed-price programs in defense, and Boeing's stock could soar in the future.
Chevron: Don't write off fossil fuel just yet
Oil major Chevron's stock can climb a wall of worry over the long term, but if this argument works, then there has to be a significant amount of pessimism built into the stock price. I would argue that that's the case, not least because there are real threats to fossil fuel stocks. They come from two intrinsically connected sources.
The first is the fear that renewable energy presents an existential threat to fossil fuel companies. The second is that the clean energy transition will lead to demand destruction for fossil fuels and lower fuel prices over time. So while appreciating that Chevron is investing in lower carbon solutions, it's impossible to avoid the argument that Chevron's revenue and earnings are led by oil and gas prices.
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That said, Chevron bulls point out that the oil majors are much more disciplined in their spending plans in the current cycle of oil prices. Moreover, Saudi Arabia and other OPEC members recently agreed to cut production to support the price of oil -- a possible sign of a long-term shift in strategy. Both events are supportive of a long-term upcycle in the price of oil.
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In addition, Chevron's capital spending discipline has helped it generate significant free cash flow to support its dividend (with a current yield of 3.6%) while significantly reducing debt.
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If oil prices stay at the relatively high level of around $80 a barrel over the medium to long term, then Chevron has significant potential to grow earnings, and its stock price should follow.
Caterpillar: Also a play on commodities
The heavy equipment company Caterpillar is best known for its construction equipment, so many investors conclude it's a play on construction activity. However, that's only part of the story. Caterpillar's resource industries (mining and aggregate equipment) expose it to mining capital spending and infrastructure investment. Its energy and transportation segment exposes it to oil and gas, power, and transportation. Even its construction equipment segment has exposure to energy investment -- not least to construct facilities.
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As such, high commodity prices tend to be a net benefit to the company. Moreover, Caterpillar continues to grow its service revenue to reduce its business's cyclicality. So all told, it doesn't make sense to think of Caterpillar as a cyclical play on construction activity.
That's not to say Caterpillar isn't a cyclical stock -- it is, but it's a lot more than just construction. The point is that a long-term, albeit cyclical, uptrend in commodity prices and growing service revenue could increase management's estimate of its FCF range through the cycle, currently at $4 billion to $8 billion. The midpoint is $6 billion, and using that figure plus a ballpark valuation of 20 times FCF puts it at a market cap of $120 billion compared to $111 billion, as of this writing.
If its FCF range goes higher, then so will its valuation, which could lead to significant price appreciation in the future.
