When you think of top-performing Dow stocks to buy, you might automatically think of Apple (AAPL) - it's the world’s most valuable company, a favorite of legendary investor Warren Buffett, and a leader in consumer technology. But what if we told you there is another Dow Jones Industrial Average ($DOWI) component that has been crushing Apple on the charts over several time frames - and it's not even a tech stock?
That stock is none other than Caterpillar (CAT), the world’s largest manufacturer of construction and mining equipment and a true old-school industrial name. And while CAT hasn't exactly collected AI stock-sized gains in 2023, it's worth taking a look at the stock's performance from a few different perspectives to get a sense of its real technical muscle.
CAT's Long-Term Technical Dominance
To be sure, Apple stock is outpacing comfortably CAT on a year-to-date basis - but let's not forget how much room for recovery Apple and its tech stock peers had after a brutal finish to 2022.
Looking over the past 52 weeks, Caterpillar stock has gained nearly 60%, while AAPL is only 20% higher. The broader Dow, for perspective, is up about 10% in this time frame.
More recently, focusing in on the last three months, AAPL's impressive momentum from the first half of 2023 has slowed considerably, with the shares netting a return of less than 5% over this period.
Meanwhile, CAT has gained more than 25%, powered in part by well-received Q2 earnings (by contrast, Apple missed iPhone sales estimates in its recent quarterly report).
So with CAT clearly holding its own against this tech powerhouse on the charts, let's take a look at the fundamentals.
CAT’s Earnings Beat Expectations
In its second-quarter earnings report, CAT reported revenue of $14.4 billion, marking a 29% surge compared to the previous year. Earnings per share also impressed, up 74% year-over-year to reach $5.55. Notably, both figures outperformed analysts' expectations, which were projected at $13.9 billion and $4.51 per share, respectively. Caterpillar also raised its full-year revenue and earnings guidance, and the stock led Dow gainers after the report with a rally of more than 8%.
CAT attributed its results to a global increase in infrastructure spending and investment. This surge in demand spanned all segments, with its construction, resource, and energy and transportation divisions all posting significant growth. The construction segment reported a 45% revenue increase, buoyed by higher sales volume and the introduction of new products like the electric mini excavator and autonomous dozer. At the same time, resource segment revenue was up 41%, driven by elevated sales volume in mining and entry into emerging markets like lithium and rare earths.
Plus, the energy and transportation segment contributed 16% revenue growth, propelled by increased sales volume and innovative solutions in areas such as power generation and hydrogen development in collaboration with Chevron (CVX).
Digging deeper into the report, the company's operating margin climbed from 15.3% to 17.5%, while net income margin increased from 10.7% to 12.4%. In terms of financial strength, CAT generated $2.8 billion of operating cash flow and $2.1 billion of free cash flow during the quarter. This enabled the company to increase its dividend by 10% and repurchase $1.2 billion worth of its own shares, showcasing its dedication to rewarding shareholders.
Overall, Caterpillar's recent performance show that the company is benefiting from the global economic recovery and its own operational excellence. The company's strong sales and revenue growth, strategic collaboration with Luck Stone, and commitment to a reduced-carbon future demonstrate its ongoing leadership in the industrial sector.
What Analysts Expect from Caterpillar Stock
Looking into CAT's future, analysts have a positive outlook for earnings growth. Fiscal 2023 earnings are expected to improve by 43.1% overall compared to 2022. The average earnings estimate for the full year stands at $19.81 per share, drawn from 11 estimates. These predictions span from a high estimate of $20.86 per share to a low estimate of $18.50 per share. For fiscal year 2024, earnings growth is expected to moderate to 6.8%.
Based on 19 analysts' recommendations, CAT holds a consensus rating of moderate buy. Specifically, 7 analysts recommend a strong buy, 1 suggests a moderate buy, 9 suggest a hold, and 2 indicate a strong sell. This collective sentiment reflects the general optimism surrounding Caterpillar stock on Wall Street.
It's worth pointing out that CAT is trading above the average 12-month price target of $280.65, suggesting the shares have outperformed some analysts' expectations. That said, the Street-high target of $350 implies expected upside of nearly 23% from current levels.
Putting CAT's Valuation in Perspective
In the realm of its industrial peers, CAT's performance and fundamentals are striking. With a market capitalization of $143.4 billion, it's one of the largest industrial companies in the U.S., alongside household names like General Electric (GE) - another surprise outperformer, with GE shares now up 100% in the last 52 weeks.
At current levels, CAT looks reasonably priced. The stock's price-to-earnings ratio of 15.45 comes in lower than the sector median of 17.58, indicating its potential is somewhat undervalued. Plus, CAT's price-to-sales ratio of 2.36, price-to-cash flow ratio of 13.43, price-to-book ratio of 7.62, and earnings per share of $18.27 are all attractive relative to comparable industry-wide measures.
With an above-average dividend yield of 1.74%, and a prudent dividend payout ratio of 26.05% - below the sector average - CAT's balanced approach to rewarding shareholders bodes well for future growth.
Is Caterpillar the Best Dow Stock to Buy?
Whether we're talking about the past year, the recent month, or its financial fundamentals, CAT's on a roll. To be clear, the construction equipment firm will never replace or compete with Apple - but nevertheless, the stock's outperformance seems overdue for some recognition from investors. As we enter the historically challenging month of September, this operationally resilient industrial giant looks like a top Dow stock to buy - especially if Apple and its FAANG cohort get rattled by another wave of risk-off sentiment.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
