Caterpillar Inc. CAT shares have declined 8% since it reported year-over-year declines in its top and bottom lines for the fourth quarter of 2024 on Jan. 30. The dismal performance was led by volume declines across its segments. While earnings beat the Zacks Consensus Estimate, revenues fell short of expectations. This marked CAT’s second consecutive quarter of earnings decline after an impressive 14-quarter growth streak (despite lower revenues).

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Despite the setback in the fourth quarter, Caterpillar delivered a 3% year-over-year improvement in earnings for 2024 to $21.90. This was attributed to the improved performance in the first half of the year, which partially offset the weaker second half. However, total revenues moved down 3% for the year to $64.8 billion, reflecting consistent quarterly revenue declines.

Caterpillar expects 2025 revenues to be “slightly lower” than the 2024 reported level. The adjusted operating margin is, however, expected to be in the top half of its target range, corresponding to the anticipated level of revenues. For revenues of $64.5 billion, CAT’s operating margin target is 16-20%. 

The dip in CAT shares has made investors consider whether to increase their stake or hold on to their current investments. Let us delve deeper into the fourth-quarter results and evaluate the stock’s fundamentals.

Digging Deeper Into Caterpillar’s Q4 Performance

Construction & Resource Industries Lag: Revenues declined 5% year over year to $16.5 billion due to lower volumes in all of its segments and unfavorable price realization. Earnings per share were $5.14, 2% lower than the year-ago quarter.

The Energy and Transportation segment was the only unit to deliver year-over-year improved revenues and operating profit despite lower volumes. This was offset by weak performances in Construction Industries and Resource Industries. Both witnessed lower equipment sales to end users, dragging their revenues and profits.

For an in-depth analysis of CAT’s Q4 earnings, read: CAT Q4 Earnings Beat, Revenues Lag Estimates on Weak Volumes.

Solid Cash Position: Caterpillar’s operating cash flow for 2024 was $12 billion. The company returned $10.3 billion to shareholders as dividends and share repurchases. CAT ended 2024 with cash and equivalents of $6.9 billion.

Robust Backlog Levels: The company ended 2024 with a backlog of $30 billion. Its backlog, as a percentage of revenues, is higher than historic levels, which will support revenues in the forthcoming quarters.

Revenue Guidance Lowered, Margins Resilient: Caterpillar expects 2025 revenues to be a tad lower than the 2024 reported figure of $64.8 billion. Despite the tepid revenue expectations, the adjusted operating margin is expected to be in the top half of CAT’s target range.

The company maintains its revenue guidance at $42-$72 billion, and margins are anticipated between 10% and 22%. This is shown in the chart below.

CAT's Guidance Range

Image Source: Caterpillar

Caterpillar’s shares dipped post the disappointing results. Yet, the CAT stock has gained 12.1% in the past year compared with the industry’s 10% growth. In comparison, the Zacks Industrial Products sector has risen 9.5%. It has, however, lagged the S&P 500’s rally of 23.5%.

CAT Stock’s 1-Year Price Performance

Image Source: Zacks Investment Research

Downward Estimate Revision Activity for CAT

Image Source: Zacks Investment Research

Earnings estimates for Caterpillar have moved down 6% for both 2025 and 2026 over the past seven days, reflecting the weak guidance. Over this period, seven analysts have downgraded their estimates for 2025, whereas five have downgraded their estimates for 2026. None of the analysts revised their estimates upward. 

The Zacks Consensus Estimate for 2025 indicates a year-over-year decline of 7.4%. However, the same for 2026 suggests 11.3% growth.

Image Source: Zacks Investment Research

Few Near-Term Concerns Prevail for Caterpillar

Persisting Low Volume Trends: CAT has been witnessing a decline in overall volumes in five consecutive quarters, reflecting muted consumer spending. The Resource Industries segment’s volume declined in the last six quarters. Construction Industries’ volume growth has been in the red over the past five quarters. This is expected to persist in 2025 as well.

Weak Demand in China: Due to the slowdown in China's real estate industry, its construction industry has taken a hit. Caterpillar is expected to continue to see weak demand for the 10-ton and above excavator market in China, which had previously been one of its largest markets.

Tariff Concerns Overshadow Recent Manufacturing Rebound: The Institute for Supply Management’s manufacturing index had been in contraction for 26 consecutive months until January 2025, when it saw a modest increase to 50.9%. The New Orders Index has expanded for the past three months, following seven consecutive months of contraction.
However, sustained growth remains uncertain as the index has not delivered consistent growth since the end of its 24-month expansion streak in May 2022. The Production Index also moved into the expansion territory in January, registering 52.5% and breaking an eight-month contraction streak. The imposition of tariffs on China triggers concerns that it could disrupt supply chains and derail this recent recovery in U.S. manufacturing.

CAT’s Premium Valuation

CAT is currently trading at a forward 12-month P/S of 2.72, at a premium compared with the industry’s 2.03. The stock is also not cheap when compared with Komatsu KMTUY, Terex Corporation TEX and The Manitowoc Company MTW, which are currently trading below the industry at 1.1, 0.58 and 0.16, respectively.

Image Source: Zacks Investment Research

CAT’s Long-Term Prospects Intact

Notwithstanding the current headwinds, the increase in projects, enabled by the U.S. Infrastructure Investment and Jobs Act, creates massive opportunities for Caterpillar’s wide range of construction equipment. Worldwide efforts to transition to clean energy will require a vast amount of commodities, which, in turn, will boost the demand for its mining equipment. As miners are increasingly relying on autonomy to increase productivity and efficiency, and improve safety, CAT has been focusing on enhancing its autonomous fleet.

In Energy and Transportation, strong order rates in most applications are expected to support revenues. In the Oil and Gas sector, the increased focus on sustainability will drive the demand for CAT equipment. As technology companies establish data centers globally to support their generative AI applications, the company is witnessing robust order levels for reciprocating engines for data centers. It is planning to double its output with a multi-year capital investment.

CAT has been seeing growth in aftermarket parts and service-related revenues, which generate high margins. The company is on track to double its service revenues from $14 billion in 2016 to $28 billion in 2026.

Caterpillar has a long-term EPS growth rate of 9.3%.

CAT Offers Attractive Dividend Yield & Payout

Caterpillar’s 1.56% dividend yield is higher than the sector’s yield of 1.38% and the S&P 500’s 1.2%. The company has a five-year dividend growth rate of 7.4% and a payout ratio of around 26%, higher than its peers. The company has a solid track of paying out higher dividends to shareholders for 30 straight years.

How Should Investors Approach CAT Stock Post Q4 Earnings?

The decline in volumes in Caterpillar’s major two segments has been weighing on its performance. The prolonged contraction in the U.S. manufacturing sector, imposition of tariffs and weak demand in China add to the concerns. New investors should wait for a better entry point, given its higher valuation.

However, existing shareholders should stay invested in the CAT stock to benefit from its solid long-term demand prospects, backed by infrastructure spending and energy-transition trends, as well as its focus on growing service revenues. Caterpillar’s strong financial position enables it to invest in its businesses and return cash to shareholders through share buybacks and consistent dividend payments. The company currently has a Zacks Rank #3 (Hold), which supports our thesis.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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