Investment In Alternative Fuels And Electrification Will Expand Markets And Align With Sustainability Goals

Key Takeaways

• Investment in capacity expansion and a strong backlog are expected to drive revenue growth in Energy & Transportation.
  
• Focus on services and strategic capital deployment aims to improve net margins and shareholder returns while aligning with sustainability goals.
  
• Lower volumes and an unfavorable mix are straining potential revenue and margin growth, with anticipated sales declines in 2025 potentially affecting earnings.

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.

• Continued investment in capacity expansion for large reciprocating engines in response to demand from data centers and energy generation is expected to drive revenue growth in Energy & Transportation.
  
• Strong backlog in Energy & Transportation, particularly in power generation and turbines, is anticipated to bolster future revenues.
  
• Increased focus on services growth initiatives, including digital tools and customer value agreements, aims to drive higher-margin services revenue and improve net margins.
  
• Strategic capital deployment, including significant share repurchases and dividends, is expected to enhance earnings per share (EPS) as free cash flow and strong balance sheets support shareholder return strategies.
  
• Emphasis on autonomy, alternative fuels, and electrification aligns with long-term sustainability goals, potentially expanding addressable markets and offering revenue growth opportunities over time.

Caterpillar Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Caterpillar's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.7% today to 15.9% in 3 years time.
• Analysts expect earnings to reach $11.5 billion (and earnings per share of $25.39) by about March 2028, up from $10.8 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $13.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.0x on those 2028 earnings, up from 14.9x today. This future PE is lower than the current PE for the GB Machinery industry at 21.4x.
• Analysts expect the number of shares outstanding to decline by 2.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.68%, as per the Simply Wall St company report.

Caterpillar Future Earnings Per Share Growth

Risks

• Sales and revenues decreased by 5% in the fourth quarter and 3% for the full year compared to 2023, primarily due to lower sales volume and an unfavorable mix, suggesting potential strain on future revenue growth.
  
• Adjusted operating profit margin was below expectations due to lower volume and an unfavorable product mix, potentially impacting net margins.
  
• The company anticipates slightly lower sales and revenues in 2025 compared to 2024, which could affect overall earnings potential.
  
• Unfavorable price realization in 2025 is expected for Construction and Resource Industries due to post-sales merchandising programs, which may pressure net margins.
  
• Energy and Transportation sales are restrained until investments in large engine output capacity bear fruit, potentially delaying revenue and earnings growth.

Valuation

• The analysts have a consensus price target of $391.126 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 $490.0, and the most bearish reporting a price target of just $250.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $72.2 billion, earnings will come to $11.5 billion, and it would be trading on a PE ratio of 19.0x, assuming you use a discount rate of 7.7%.
• Given the current share price of $336.71, the analyst price target of $391.13 is 13.9% 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.