Caterpillar's (NYSE:CAT) Rising Efficiency Should Provide some Peace of Mind

By
Stjepan Kalinic
Published
October 25, 2021
NYSE:CAT
Source: Shutterstock

After a minor slump, fueled by turbulence in the Chinese market, Caterpillar's(NYSE: CAT) stock is attempting to rebound.

Yet, the institutions are giving mixed signals ahead of the quarterly earnings call, scheduled for October 28. We, in turn, remain optimistic about the stock as its profitability outshines the industry's averages.

View our latest analysis for Caterpillar

Earnings Preview

  • EPS: US$2.26
  • Revenue: US$12.57b

The consensus EPS estimate has been revised 0.71% higher in the past 30 days.

As we are approaching the earnings date for Caterpillar, the institutions are choosing their sides. On one side, we have Cowen, initiating the coverage with Outperform rating and a US$241 price target, with analyst Matt Elkott being optimistic about the next industrial megacycle.

On another side, Morgan Stanley is exercising caution, warning about the negative EPS revisions in the industrial machinery sector. The bank places Caterpillar among the companies that are likely to be more exposed to commodity price pressures. Furthermore, it maintains the Underweight rating, with a price target of US$165.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE measures a company's yearly pre-tax profit (its return) relative to the capital employed in the business. To calculate this metric for Caterpillar, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = US$6.4b ÷ (US$82b - US$28b) (Based on the trailing twelve months to June 2021).

Therefore, Caterpillar has a ROCE of 12%. On its own, that's a standard return; however, it's much better than the 9.5% generated by the Machinery industry.

roce
NYSE: CAT Return on Capital Employed October 25, 2021

In the above chart, we have measured Caterpillar's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Caterpillar here for free.

What The Trend Of ROCE Can Tell Us

Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 99% over the last five years.

The business is generating higher returns from the same amount of capital, which is proof that there are improvements in the company's efficiencies. On that front, things are looking good, so it's worth exploring what management has said about growth plans from now on.

In Conclusion...

In summary, we're happy to see that Caterpillar has increased efficiencies and earned higher rates of return on the same amount of capital. A remarkable 172% total return over the last five years tells us that investors are expecting more good things to come in the future, although China's worries remain a concern.

Given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Caterpillar, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.