Order Backlog And Efficiency Will Drive Future Success

Key Takeaways

• Resilient portfolio diversity and strong order backlog support stable revenue streams and bolster future growth prospects amid challenges like tariffs.
  
• Strategic investments in autonomous solutions and capital deployment enhance productivity and support long-term net margin improvement and earnings growth.
  
• Tariffs, economic uncertainty, and currency fluctuations threaten Caterpillar’s revenues and margins amid competitive pricing pressures and declining dealer inventories.

Catalysts

Manufactures and sells construction and mining equipment, off-highway diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives in the United States and internationally.

• Caterpillar has experienced strong order rates leading to a $5 billion increase in their backlog, a record level, which is expected to support future revenue growth.
  
• The significant growth in the Energy & Transportation segment, driven especially by power generation, indicates a potential to improve net margins due to increased demand for higher-margin products like reciprocating engines for data centers.
  
• Despite current challenges, such as tariffs, Caterpillar's broad portfolio diversity allows for resilience, suggesting that the company's revenue streams and margins are expected to remain stable.
  
• With strong free cash flow expectations and continued capital deployment strategies like share buybacks and dividends, earnings per share growth is likely to be a focus.
  
• Caterpillar's adoption of autonomous solutions and investment in operational efficiencies are positioned to increase net margins over the long term by enhancing productivity and reducing costs.

Caterpillar Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Caterpillar's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.7% today to 14.8% in 3 years time.
• Analysts expect earnings to reach $11.4 billion (and earnings per share of $25.76) by about May 2028, up from $9.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $8.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.2x on those 2028 earnings, up from 15.2x today. This future PE is lower than the current PE for the GB Machinery industry at 21.6x.
• Analysts expect the number of shares outstanding to decline by 2.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.75%, as per the Simply Wall St company report.

Caterpillar Future Earnings Per Share Growth

Risks

• Potential impacts from tariffs could result in a significant cost headwind, leading to reduced net margins if not mitigated effectively.
  
• Lower sales volume due to changes in dealer inventories and unfavorable price realization could negatively affect revenue growth.
  
• Competition and pricing pressures, particularly in the Construction Industries, might constrain the ability to increase prices, potentially affecting profit margins.
  
• Economic uncertainty and potential negative growth in the second half of the year could lead to lower sales and revenues than expected, impacting earnings.
  
• Currency fluctuations have been noted as an unfavorable factor, affecting revenues and potentially profit margins due to foreign exchange impacts.

Valuation

• The analysts have a consensus price target of $365.537 for Caterpillar based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $427.41, and the most bearish reporting a price target of just $272.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $77.4 billion, earnings will come to $11.4 billion, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 7.8%.
• Given the current share price of $320.89, the analyst price target of $365.54 is 12.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.