Caterpillar Inc. CAT is currently trading at a forward 12-month P/S of 2.55X compared with the manufacturing - construction and mining industry’s 1.87X. With a Value Score of C, the CAT stock may not present a compelling value proposition at these levels.

Image Source: Zacks Investment Research

The stock appears expensive compared with peers like Komatsu KMTUY, Terex Corporation TEX and The Manitowoc Company MTW, which are trading below the industry at 1.1, 0.49 and 0.16, respectively.

Caterpillar’s premium valuation raises concerns, considering its revenue declines over the past four quarters amid weak volume trends and its forecast for lower revenues in 2025 as well. The stock’s recent price performance has also not been impressive.

CAT shares have lost 6% so far this year compared with the industry’s 5.8% decline. In comparison, the Zacks Industrial Products sector and the S&P 500 have fallen 3% and 0.9%, respectively, in the same period.

CAT Stock Underperforms Industry, Sector & S&P 500

Image Source: Zacks Investment Research

Caterpillar’s Current Challenging Market Landscape

Declining Sales Volumes & Revenues: CAT’s volume growth has been declining for five consecutive quarters, reflecting muted consumer spending. The impact has been more pronounced in its two major segments — Resource Industries (down in the last six quarters) and Construction Industries (down in five quarters). This offset the improved performance of the Energy and Transportation segment. This scenario is anticipated to repeat in 2025 as well.

Due to lower volumes, Caterpillar's revenue growth has been in the red for the past 4 quarters, whereas earnings declined in the last two.

Weak Demand in China: CAT’s performance has been impacted by the downturn in China's real estate sector. The demand for 10-ton and larger excavators, once a key market for CAT, has weakened significantly.

Muted Outlook for 2025: Caterpillar expects 2025 revenues to be a tad lower than the 2024 actual of $64.8 billion. The adjusted operating margin is, however, expected to be in the top half of its target range, corresponding to the anticipated level of revenues. 

The company maintains its revenue guidance at $42-$72 billion, with margins between 10% and 22%. For revenues of $64.5 billion, CAT’s operating margin target is 16-20%.

Image Source: Caterpillar

Slowdown in Order & Recent Tariff Concerns: The Institute for Supply Management’s manufacturing index expanded in January and February 2025 after a prolonged 26-month contraction. Meanwhile, the New Orders Index contracted with a 48.6% reading in February after three months of expansion. The index was down 6.5 percentage points from January — the highest single-month decline since April 2020.

Customers are pausing new orders as a result of uncertainty regarding tariffs. The ISM Prices Index registered 62.4% in February, 7.5 percentage points higher than in January, reflecting an increase in commodity prices as a result of the impacts of new and potential tariffs.

Downward Estimate Revision Activity for CAT

Earnings estimates for Caterpillar have moved down over the past 60 days. Over this period, 11 analysts have downgraded their estimates for 2025, whereas six have downgraded the same for 2026. None of the analysts revised their estimates upward.

Image Source: Zacks Investment Research

The Zacks Consensus Estimate for 2025 earnings indicates a year-over-year decline of 10.3%. The consensus mark for revenues suggests a drop of 2.3%. However, earnings estimates for 2026 suggest 12.9% growth, with revenues rising 5.4%.

Image Source: Zacks Investment Research

Image Source: Zacks Investment Research

Find the latest earnings estimates and surprises on Zacks Earnings Calendar.

Long-Term Narrative for Caterpillar Remains Strong

Despite current headwinds, CAT stands to benefit from the surge in projects, driven by the United States Infrastructure Investment and Jobs Act, creating significant opportunities for its diverse construction equipment lineup. The shift toward clean energy will drive demand for essential commodities, boosting the need for CAT’s mining equipment. Meanwhile, the company's advancements in autonomous fleet are gaining momentum as miners are increasingly adopting automation to enhance efficiency and safety.

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 9.4%.

Our Final Take on CAT Stock

While Caterpillar is an attractive investment option for long-term investors, its efforts to combat the current challenging landscape will be crucial. Considering the premium valuation, ongoing decline in volumes in its two main segments and downward earnings revisions, selling this stock would be a prudent move at present. The stock currently carries a Zacks Rank #4 (Sell).

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

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

The Manitowoc Company, Inc. (MTW) : Free Stock Analysis Report

Caterpillar Inc. (CAT) : Free Stock Analysis Report

Terex Corporation (TEX) : Free Stock Analysis Report

Komatsu Ltd. (KMTUY) : Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research