CAT - Caterpillar: Overreaction To Dealer Inventory Situation And Good Medium-Term Prospects Present A Buying Opportunity

2024-05-19 04:48:00 ET

Summary

• Caterpillar's revenue growth is expected to recover next year due to strength in the Energy & Transportation business and a rebound in the Construction business.
• The company's E&T business is experiencing strong demand for reciprocating engines, particularly from data centers, which is driving revenue growth.
• Despite concerns about high dealer inventories, the situation is manageable, and the stock is trading at a discount, making it a good buying opportunity.

Investment Thesis

I last covered Caterpillar ( CAT ) stock in February last year with a buy rating, and the stock is up a solid 42% since then. While Caterpillar Inc. faces near-term revenue growth challenges in 2024, its revenue growth is poised to recover next year due to continued strength in the Energy & Transportation (E&T) business and a rebound in the Construction business in FY25, which should offset any weakness in the Resources business. The company’s E&T business is seeing strong demand for reciprocating engines, especially from data centers, and the company is making multiyear capital investments to cater to this demand, which bodes well for revenue growth. Further, secular demand tailwinds like the recent reshoring trend and IIJA funding are supporting the non-residential construction business. Additionally, the residential construction business, which is experiencing a slowdown, should also see a rebound with a potential reversal in the global interest rate cycle in the coming years. While the investors are concerned about the high dealer inventories, I believe this situation is manageable if we account for $300 mn in E&T project related inventory that is backed by firm customer orders....

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