What would a recession mean for Caterpillar stocks?


Stock Caterpillar (NYSE: CAT) fell 9% over the past month, due to fears of recession and its impact on the company’s activity, after a solid financial performance in recent quarters, driven by strong demand for equipment industries and a better price environment. For the perspective, in 2021, Caterpillar
saw its industrial equipment sales jump 23% to $48.2 billion. All three segments – construction, resources, energy and transportation – recorded sales growth of more than 20%. The company also saw its adjusted net margins increase by 300 basis points to 11.6%, leading to a significant 65% increase in adjusted EPS to $10.81 from $6.56 in 2020.

However, investors are now worried about whether the momentum will continue. The US economy could be heading into a recession as the Federal Reserve seeks to raise interest rates more aggressively to bring soaring inflation under control. The central bank raised rates 0.75% this month after raising them 0.5% last month. There is a possibility of another rate hike as early as next month. [1] Consumer confidence is also down as soaring energy, food and housing prices eat away at household budgets. Markets are already anticipating some economic difficulties, with the S&P500 correcting by around 24% since the start of the year. CAT stock was down just 6% over the period, outperforming broader markets.

We do not believe that a recession will significantly harm Caterpillar. While industrial companies typically see sales slump in an economic downturn, we expect Caterpillar’s business to hold up much better. The demand for industrial equipment is currently strong. A major factor that is likely to help Caterpillar’s sales is high raw material prices, which translates into higher capital expenditures for miners, boosting demand for Caterpillar mining equipment. Resource industries were the best performing segment for Caterpillar in the first quarter, with sales growth of 30% year-over-year, driven by strong end-user demand for heavy construction and mining equipment. Company management expects strong end-user demand and price realization to help drive revenue growth in 2022. Additionally, economic indicators do not point to a deep recession this time around. , with household savings increasing post-pandemic and banks also remaining well capitalized.

We believe CAT stock remains a good value at its current market price of around $195 per share, trading at around 16 times expected earnings. This is a low multiple compared to the 19x average of the last three years. We have a valuation of $235 per share, nearly 20% ahead of the current market price. See our analysis on Caterpillar Rating: Are CAT shares expensive or cheap? for more details on Caterpillar’s rating and how it compares to its peers. For more information on Caterpillar’s business model and revenue trends, see our dashboard at Caterpillar turnover: How CAT makes money.

Although CAT stock looks like a good value, it’s worth seeing how Caterpillar peers price on the measures that matter. You will find other useful comparisons for companies in all sectors on Peer comparisons.

In addition, the Covid-19 crisis has created many price discontinuities which can provide interesting trading opportunities. For example, you’ll be surprised how counter-intuitive stock valuation is to CSX vs. Simpson Manufacturing


Stock prices have fallen precipitously across all sectors over the past few months and we are now in a bear market for the first time since March 2020, when the Covid-19 outbreak triggered a stock market crash. We capture key Dow Jones trends during and after major stock market crashes in our interactive dashboard analysis,’Comparison of stock market crashes.’

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