Construction and mining equipment behemoth Caterpillar Inc. (NYSE: CAT) reported earnings for its first fiscal quarter recently. The result was good. Revenue grew 4% versus the same period last year. I know what you are thinking, that sounds less than impressive – but CAT had not seen revenue growth in over two years. Investors cheered and catapulted the shares higher.
Asia Pacific and Latin America fueled the rebound. A resurgent infrastructure market in China drove demand for construction equipment while improving conditions on the mining front saw better sales in Australia. A recovery in energy markets boosted demand in Latin America and other places. Some weak spots remained, most noticeably in the U.S. (CAT’s largest market). But most analysts characterised the report as a turn in the cycle.
Looking at the result alone, one might imagine that CAT’s stock is poised for a rally. After all, the company has fallen a long way with revenue almost half of what it was just a few years ago and management navigating a criminal probe in the U.S. If its end markets continue to improve, profits will undoubtedly skyrocket from here.
Already priced in
But the stock market is an anticipatory system. Caterpillar’s share price has already run up in expectation of these improved results. When I look at CAT, the current price already strikes me as reflective of a fairly optimistic future.
The highest profit attained in the company’s history occurred in 2012 when both revenue and profit margins reached their zenith. The stock trades at 12.3x those top-of-the-cycle earnings. And it might not surpass 2012 peaks for a long time.
Caterpillar is a better business than the average cyclical company. Still, I’ll pass on betting on a cyclical already priced for peak earnings.
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