Caterpillar Trades at Premium Valuation: How to Play the Stock?

Caterpillar Inc. CAT stock is currently trading at a forward price-to-sales ratio of 4.50, above the manufacturing - construction and mining industry’s 3.47. 
With a Value Score of D, CAT stock does not appear to be a compelling value proposition at these levels. 

CAT appears notably expensive compared with peers Komatsu KMTUY and Terex Corporation TEX, which are trading at 1.50 and 1.02, respectively, well below the industry average.

CAT shares have gained 19.7% in the past three months compared with the industry’s 21.2% growth. The Zacks Industrial Products sector gained 15.8% while the S&P500 declined 0.3%, in the same period. Notably, Komatsu and Terex have outperformed CAT during this period, as shown in the chart below.

Let’s take a look at CAT’s fundamentals to better analyze how to play the stock.

CAT Returns to Earnings Growth in Q4

Caterpillar reported revenues of around $19.1 billion in the fourth quarter of 2025, an all-time quarterly record. Revenues rose 18% year over year, mainly led by higher volumes with growth reported across all segments. 

Backlog increased sequentially by $11.3 billion during the quarter, reaching a record $51.2 billion.

However, the cost of sales climbed 29% year over year due to higher manufacturing expenses, mainly due to tariffs. As a result, adjusted operating profit declined 9% to $2.66 billion, while adjusted operating margin narrowed to 15.6% from 18.3% in the fourth quarter of 2024.

Despite tariff pressures, earnings per share inched up 0.4% year over year to $5.16.  Even though modest, this marked a return to positive earnings growth for Caterpillar following five quarters of declines.

CAT FY26 View: Revenues to Grow, Tariffs to Pressure Margins

For 2026, the company expects year-over-year revenue growth near the upper end of its long-term 5-7% CAGR target. Adjusted operating margin is, however, expected near the bottom of the targeted range, considering continued tariff pressures. CAT expects a tariff headwind of around $2.6 billion for 2026. 

The company projects adjusted operating margins of 15–19% at revenue levels of around $60 billion. If revenues reach $72 billion, operating margins are expected to be 18–22%, while revenues of $100 billion could support margins in the range of 21–25%. This is shown in the chart below.

Pickup in Manufacturing Offers Hope, But Durability Remains Key for CAT

The Institute for Supply Management’s manufacturing index had been in contraction for 26 consecutive months (below 50) through December 2024. Although it briefly moved into expansion in January and February 2025, the index remained in contraction again from March through December 2025. 

In 2026, the index returned to expansion with a reading of 52.6% in January, followed by 52.4% in February, indicating growth in manufacturing activity. While these readings are encouraging, last year’s uneven trend suggests that the sustainability of this recovery will be important to monitor.

The New Orders Index expanded in February with a reading of 55.8%, a decrease compared with January’s 57.1%. The index has struggled to maintain consistent momentum since the conclusion of its 24-month expansion streak in May 2022, underscoring the need for sustained demand strength to support a durable upcycle.

CAT’s Earnings Estimates Trend Upward

The Zacks Consensus Estimate for CAT’s 2026 earnings indicates year-over-year growth of around 19%. The consensus mark for 2026 revenues suggests growth of 8.9%. Earnings estimates for 2027 suggest 21.6% growth, with revenues rising 8.8%.

Earnings estimates for Caterpillar for both 2026 and 2027 have moved up over the past 60 days.

Caterpillar Delivers Attractive Returns

Caterpillar’s return on equity (ROE) is 45.76%, higher than the industry’s average of 45.12% and the S&P 500’s 32.95%. 

Caterpillar Sets Long-Term Growth Targets

Caterpillar is targeting revenue growth at a CAGR of 5–7% through 2030, with MP&E free cash flow projected in the $6-$15 billion range. The company plans to return substantially all MP&E free cash flow to shareholders over time and aims to grow its dividend at a high-single-digit rate, following a 7% increase in 2025.
Operational targets include increasing Construction Industries’ sales to users by 1.25 times by 2030 (from 2024 levels), tripling autonomous trucks in Resource Industries and doubling Power Generation sales. Connected assets are expected to rise from more than 1.6 million to 2 million, while e-commerce sales per business day are projected to jump from 4% to more than 50% by 2030.

The company’s long-term outlook is supported by rising U.S. infrastructure spending, growing demand for mining equipment tied to the energy transition and increased adoption of autonomous solutions to improve productivity and safety. In Power & Energy, sustainability initiatives and data-center investments are driving demand. Caterpillar is also expanding its high-margin aftermarket business, with service revenues targeted to increase from $24 billion in 2025 to $30 billion by 2030.

Our Final Take on Caterpillar Stock

Existing shareholders should continue to hold Caterpillar stock, supported by strong long-term demand drivers, improving earnings visibility and a growing, high-margin services business. Upward earnings estimate revisions further reinforce the company’s positive outlook. However, CAT’s premium valuation suggests that new investors may want to wait for a more attractive entry point. The company currently has a Zacks Rank #3 (Hold), which supports our thesis.

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

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

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