There are no two ways about it: Caterpillar (NYSE: CAT) is a cyclical company. Its revenue and earnings tend to rise and fall in sync with the general trends in the global economy.
So everyone shouldn't be surprised then that Caterpillar faces some near-term risks from a slowdown in the global economy, not least from a cooling construction market in China. That said, investors don't just buy stocks as short-term bets on the economy. Also, there's reason to believe Caterpillar will emerge stronger from a recession, should it happen. Let me explain.
The cyclicality in Caterpillar's earnings is implicitly recognized in management's targets. For example, back in its 2019 Investor Day presentation, management told investors to expect its annual machinery, energy, and transportation (ME&T) free cash flow to be in the range of $4 billion to $8 billion during the current cycle, in contrast to the $3 billion to $6 billion it achieved during the 2010-2016 cycle. Moreover, management is aiming for its adjusted operating margin to be in the 10% to 21% range, with a 300 basis point to 600 basis point improvement on the margins achieved in the 2010-2016 period.
For further details see:
This Dow Jones Stock Is a More Recession-Proof Than You Think