What a time it’s been for Caterpillar. In the past six months alone, the company’s stock price has increased by a massive 55.7%, setting a new 52-week high of $810.23 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Caterpillar, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Caterpillar Not Exciting?
Despite the momentum, we don't have much confidence in Caterpillar. Here are three reasons you should be careful with CAT and a stock we'd rather own.
1. Revenue Growth Flatlining
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Caterpillar’s recent performance shows its demand has slowed as its revenue was flat over the last two years. 
2. Low Gross Margin Hinders Flexibility
All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.
Caterpillar’s gross margin is slightly below the average industrials company, giving it less room to invest in areas such as research and development. As you can see below, it averaged a 29.2% gross margin over the last five years. That means Caterpillar paid its suppliers a lot of money ($70.77 for every $100 in revenue) to run its business. 
3. EPS Took a Dip Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Sadly for Caterpillar, its EPS declined by 5.2% annually over the last two years while its revenue was flat. This tells us the company struggled to adjust to choppy demand.
Final Judgment
Caterpillar isn’t a terrible business, but it isn’t one of our picks. After the recent surge, the stock trades at 34.7× forward P/E (or $810.23 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward the most dominant software business in the world.
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