Caterpillar Misses on Q1 Earnings: Buy, Sell or Hold the Stock?

Core Insights - Caterpillar Inc. reported disappointing first-quarter 2025 results, with a 10% year-over-year revenue decline to $14.2 billion and a 24% drop in earnings per share to$ 4.25, marking the fifth consecutive quarter of revenue decline and the third straight quarter of earnings decline [1][9][10] - Despite the weak performance, CAT shares have increased by 2% due to a record $5 billion sequential increase in backlog, totaling$ 35 billion, and the company has maintained its revenue projections for 2025 to be roughly flat compared to 2024, excluding tariffs [2][11][12] - Year-to-date, CAT stock has decreased by 13.1%, underperforming the industry growth of 10% and the S&P 500's increase of 5.7% [3][6] Financial Performance - The operating cash flow fell to $1.3 billion from$ 2.05 billion year-over-year due to lower profits, while the backlog remains strong at $35 billion [11] - The company expects revenues for 2025 to be flat compared to 2024 when excluding tariffs, with adjusted operating profit margins anticipated in the top half of the target range [12][13] - Earnings estimates for CAT have been revised down by 4% for 2025 and 5% for 2026, indicating a projected 13.5% decline in 2025 earnings [17] Market Position and Competitors - Caterpillar's peers, Deere & Company and Komatsu, have performed better year-to-date, with gains of 13.3% and 4.7%, respectively, while Manitowoc has declined by 10.9% [6][27] - CAT is currently trading at a forward 12-month P/E of 16.00X, which is a premium compared to the industry average of 14.89X [22][26] Long-Term Outlook - Despite short-term challenges, Caterpillar's long-term growth is supported by expected increases in U.S. infrastructure spending and rising demand for mining equipment due to energy transition [27] - The company aims to double its service revenues from$ 14 billion in 2016 to $28 billion by 2026, indicating a focus on high-margin aftermarket parts and services [28] Dividend and Shareholder Returns - CAT offers a dividend yield of 1.80%, higher than the sector's 1.56% and the S&P 500's 1.32%, with a five-year dividend growth rate of 7.7% and a payout ratio of around 27% [31] - The company has a strong track record of paying higher dividends for 30 consecutive years, which supports its appeal to existing shareholders [31]