Since September 2020, the S&P 500 has delivered a total return of 99.4%. But one standout stock has doubled the market - over the past five years, Caterpillar has surged 197% to $452.50 per share. Its momentum hasn’t stopped as it’s also gained 34.4% in the last six months, beating the S&P by 16.9%.

Is there a buying opportunity in Caterpillar, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Caterpillar Not Exciting?

We’re happy investors have made money, but we don't have much confidence in Caterpillar. Here are three reasons why CAT doesn't excite us and a stock we'd rather own.

1. Core Business Falling Behind as Demand Declines

Investors interested in Construction Machinery companies should track organic revenue in addition to reported revenue. This metric gives visibility into Caterpillar’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Caterpillar’s organic revenue averaged 1.3% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Caterpillar might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Caterpillar’s revenue to rise by 5%. While this projection indicates its newer products and services will spur better top-line performance, it is still below the sector average.

3. Recent EPS Growth Below Our Standards

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Caterpillar’s EPS grew at a weak 2.7% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its 1.3% annualized revenue declines and tells us management adapted its cost structure in response to a challenging demand environment.

Final Judgment

Caterpillar’s business quality ultimately falls short of our standards. With its shares topping the market in recent months, the stock trades at 22.7× forward P/E (or $452.50 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better investments elsewhere. We’d suggest looking at one of our top software and edge computing picks.

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