Where Will Caterpillar Stock Be in 1 Year?

Predicting where cyclical companies will be in a year is difficult, but that doesn't mean investors can't look at various scenarios before deciding whether to invest. In the case of Caterpillar (CAT 1.59%), management's outlook for 2024 implies that its sales, profit, and cash flow may have peaked. However, its end markets may have different ideas.

Slowing growth

Given the cyclicality of its revenue and earnings (meaning they vary greatly depending on growth conditions, notably in non-residential construction, mining, and other markets), it's always difficult for management to give detailed full-year guidance. For example, not even the Federal Reserve knows where interest rates will be, which impacts construction activity. Similarly, forecasting mining and energy commodity prices and capital spending tendencies is difficult.

That said, Caterpillar's management can understand the dynamics of its own business and the order patterns coming from its dealers. As a reminder, Caterpillar sells most of its machinery and power systems to independent dealers and original equipment manufacturers (OEMs) who then sell to the end user.

As such, its sales are better understood as sales to dealers. Caterpillar's management routinely looks into dealer inventories and their sales trends to better understand its sales prospects to those dealers.

The chart below shows the evolution of retail sales, meaning its dealers' sales. The chart shows how the growth of its machine sales (resource industries and construction industries) is slowing.

Chart by author. Data source: Caterpillar presentations.

Management's guidance

Management touched on slowing growth during the company's recent earnings call. The table below shows segment profit so you can see the relevance of each segment and a summary of management's outlook for 2024. Note management doesn't expect much growth from construction and resource industries sales in 2024, and energy and transportation is somewhat of a wild card as dealers adjust inventory to how they see their pipelines. That could depend on trends in energy prices and rail investment.

Data source: Caterpillar presentations.

Caterpillar could also come under margin pressure in 2024, at least compared to 2023, for two resons. First, management biased its production toward the products that added the most value in 2023, but CFO Andrew Bonfield expects "a more normalized mix of products in 2024." Second, Bonfield expects sales to be "slightly more weighted toward energy and transportation than they were in 2023," implying a lower margin mix as that segment's profit margin tends to be lower than the other two.

As for free cash flow (FCF) in 2024, Bonfield forecasts hitting FCF in the "top half" of its updated range of $5 billion to $10 billion through the cycle. Given that FCF was at $10 billion in 2023, it implies merely matching the figure is the extent of the possibility for 2024.

Where will Caterpillar be in one year?

Naturally, all of these assumptions are built into Wall Street analyst expectations, and the consensus has Caterpillar's sales growing by a meager 0.5%, with earnings per share pretty much flat at $21.27 in 2024 compared to $21.21 in 2023. These factors might lead investors to conclude that Caterpillar isn't worth investing in as its growth is slowing.

Image source: Getty Images.

That said, within construction industries and resource industries (mining and aggregates as used in roadbuilding), dealers will build inventory if they see sales growing. While the sales trends are unfavorable (see chart above), they could change in a lower interest rate environment. In addition, higher prices for industrial metals and minerals will encourage spending on mining machinery.

Within energy and transportation, end-market demand growth could lead to increased customer orders, leading to dealers increasing inventory dramatically and quickly as their inventory tends to be backed by orders.

Alternatively, if all these factors move in the other direction, Caterpillar could face more pressure on sales and profit margin than management and investors expect.

All told Caterpillar is a cyclical play on the economy, and it belongs in a category of stocks to buy if you think rates are heading lower and you are bullish on energy and commodity prices. There are probably better ways to invest in this theme on a risk/reward basis, but that doesn't mean that Caterpillar doesn't have upside potential if a cyclical upturn occurs.