Caterpillar stock hits new highs; time to ring the register?

Key Points

• Caterpillar hit a peak and may correct to lower levels, but this is a buy-the-dip opportunity. 
• Strength in critical segments and end-market normalization in others sets the business up for growth later in the year.
• Analysts favor the stock and support the price action; the new high target was set after the release and would be a new all-time high. 

Caterpillar NYSE: CAT stock surged more than 5% following its Q4 release, extending the 2023 rally to 100% and the gains since the 2020 lows to 250%, setting up an attractive selling opportunity. While taking profits is never a bad thing, investors should think hard before closing out the entire position. Caterpillar’s post-release price action suggests a top, but other factors are at play. Among them are the analysts. 

The analysts are Holding Caterpillar stock and supporting the market with upward price target revisions. The consensus target lags the market’s advance and may present a near-term headwind, but the trend remains positive. Marketbeat.com tracks one fresh revision within the first 24 hours of the release, which is favorable to the trend. TD Cowen maintained its Outperform rating and raised the price target to $338, setting a new high. This target is only 5% above the current action but well into the new high territory.

Caterpillar builds leverage for earnings growth

Caterpillar had a mixed quarter, but only regarding the analyst's estimates. The revenue of $17.1 billion fell short of the Marketbeat.com consensus figure but is up 3%, and the miss was slim. Revenue gains were driven by pricing offset by a slight decline in volume that is more positive for business than not. 

The volume decline is associated with a reduced dealer inventory that sets the business up for improving sales as the year progresses, with improved price realization in the mix. The company’s diverse offerings also played a role, with weakness in the construction and resource industries offset by a 12% gain in energy and a 15% increase in financing revenue. Because the oil industry is still in the first half of a major spending upcycle, the energy segment will likely continue to be strong in 2024 and 2025. 

Margin news is also favorable to the long-term stock price trajectory. The company improved its GAAP and adjusted operating margins, 830 bps GAAP and 190 adjusted, to drive additional leverage on the bottom line. The adjusted earnings grew by 35% compared to the 3% top-line increase, with margin strength expected to persist into the current fiscal year. 

The company didn’t give specific guidance for the year but views 2024 as largely similar to 2023 with the addition of better margins. The company raised its target range for margin by 100 basis points and sees the 2024 margin in the upper half. The analysts' consensus going into the release expected 1% revenue growth with earnings contraction; the industrial sector is expected to post double-digit earnings growth in 2024, and Caterpillar is the largest holding. 

Caterpillar capital returns will remain strong in 2024

Among the attractions for Caterpillar stock is the company’s capital returns. The company generated $12.9 billion in operating cash flow in 2023 and returned more than $7 billion to shareholders. Capital returns included $5 billion in repurchases and $2.6 billion in dividends for an effective yield near 5%. The dividend yield is worth about 1.6% to investors, and the payout is growing. Caterpillar is a Dividend Aristocrat on track to make its 31st increase this year. The subsequent increase is expected mid-year and should be in the range of 7.5%. Repurchases are worth about 3.2% of the market cap going into the report and have the share count down nearly 2.7% YOY. 

The technical outlook: Caterpillar peaks. Buy on the dip 

Caterpillar hit a peak following the Q4 release, but the uptrend in prices is unlikely to be over. The stock trades at a reasonable 16X earnings, aligning with the S&P 500, and comes with an outlook for margin improvement, earnings growth and robust capital returns. The market may support the stock at the previous week’s high, near $300, but firmer support levels are found at $300 and $275.