Caterpillar (CAT)

Construction equipment company Caterpillar (NYSE:CAT) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 9.8% year on year to $14.25 billion. Its non-GAAP profit of $4.25 per share was 2.3% below analysts’ consensus estimates.

Company Overview

With its iconic yellow machinery working on construction sites, Caterpillar (NYSE:CAT) manufactures construction equipment like bulldozers, excavators, and parts and maintenance services.

Automation that increases efficiencies and connected equipment that collects analyzable data have been trending, creating new sales opportunities for construction machinery companies. On the other hand, construction machinery companies are at the whim of economic cycles. Interest rates, for example, can greatly impact the commercial and residential construction that drives demand for these companies’ offerings.

Competitors of Caterpillar include Deere (NYSE:DE), Volvo Construction Equipment (STO:VOLV-B), and Japanese multinational corporation Komatsu (TYO:6301).

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Caterpillar’s 4.4% annualized revenue growth over the last five years was sluggish. This wasn’t a great result compared to the rest of the industrials sector, but there are still things to like about Caterpillar.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Caterpillar’s recent performance shows its demand has slowed as its annualized revenue growth of 1.3% over the last two years was below its five-year trend. We also note many other Construction Machinery businesses have faced declining sales because of cyclical headwinds. While Caterpillar grew slower than we’d like, it did do better than its peers.

This quarter, Caterpillar missed Wall Street’s estimates and reported a rather uninspiring 9.8% year-on-year revenue decline, generating $14.25 billion of revenue.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months, a slight deceleration versus the last two years. This projection is underwhelming and indicates its products and services will see some demand headwinds. At least the company is tracking well in other measures of financial health.

Caterpillar’s gross margin is slightly below the average industrials company, giving it less room to invest in areas such as research and development. As you can see below, it averaged a 29.3% gross margin over the last five years. Said differently, Caterpillar had to pay a chunky $70.66 to its suppliers for every $100 in revenue.

In Q1, Caterpillar produced a 37.1% gross profit margin, up 2.9 percentage points year on year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Caterpillar has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 16.2%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Caterpillar’s operating margin rose by 7.6 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, Caterpillar generated an operating profit margin of 18.1%, down 4.2 percentage points year on year. Conversely, its gross margin actually rose, so we can assume its recent inefficiencies were driven by increased operating expenses like marketing, R&D, and administrative overhead.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Caterpillar’s EPS grew at a spectacular 15.4% compounded annual growth rate over the last five years, higher than its 4.4% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Caterpillar’s earnings to better understand the drivers of its performance. As we mentioned earlier, Caterpillar’s operating margin declined this quarter but expanded by 7.6 percentage points over the last five years. Its share count also shrank by 13.4%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Caterpillar, its two-year annual EPS growth of 13.7% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.

In Q1, Caterpillar reported EPS at $4.25, down from $5.60 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Caterpillar’s full-year EPS of $20.56 to shrink by 5.5%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Caterpillar has shown robust cash profitability, enabling it to comfortably ride out cyclical downturns while investing in plenty of new offerings and returning capital to investors. The company’s free cash flow margin averaged 12.7% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that Caterpillar’s margin expanded by 1.2 percentage points during that time. This is encouraging because it gives the company more optionality.

Caterpillar’s free cash flow clocked in at $371 million in Q1, equivalent to a 2.6% margin. The company’s cash profitability regressed as it was 7 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Caterpillar’s five-year average ROIC was 34.8%, placing it among the best industrials companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Caterpillar’s ROIC has increased significantly. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

Caterpillar reported $3.56 billion of cash and $38.59 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $14.3 billion of EBITDA over the last 12 months, we view Caterpillar’s 2.4× net-debt-to-EBITDA ratio as safe. We also see its $337 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We struggled to find many positives in these results. Its revenue missed significantly and its EPS fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock remained flat at $308.55 immediately following the results.

Updated: May 22, 2025 at 10:07 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Caterpillar.

Caterpillar doesn’t top our investment wishlist, but we understand that it’s not a bad business. Although its revenue growth was uninspiring over the last five years and analysts expect growth to slow over the next 12 months, its expanding operating margin shows the business has become more efficient. We advise investors to be cautious with this one, however, as its projected EPS for the next year is lacking.

Caterpillar’s P/E ratio based on the next 12 months is 17.8x. Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $366.79 on the company (compared to the current share price of $344.06).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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