Caterpillar gains as Jefferies names it top machinery pick for 2025

Investing.com -- Jefferies analysts reiterated Caterpillar (NYSE:CAT) as their top stock pick in the machinery sector for 2025, leading to a 1% rise in the company’s shares in premarket trading.

CAT, which saw its shares surge by 35% year to date in 2024, continues to be favored due to several underlying fundamentals that prompted an upgrade in the first quarter of 2022.

The company, known for its dominance in the production of large earthmoving equipment, is well-positioned to benefit from global infrastructure and reshoring trends, according to Jefferies.

Moreover, Caterpillar remains a key player in the backup power segment for data centers. With an anticipated resolution of the conflict in Ukraine, there is potential for increased demand for rebuilding efforts, and a more lenient regulatory environment could further enhance activities in the oil, gas, and mining sectors.

Caterpillar's financial performance is closely tied to the commodities market, with a substantial portion of its profits historically derived from these sectors.

“In fact, CAT has historically been an excellent sore of value in periods of commodity inflation,” analysts led by Stephen Volkmann said in a note. “At the last cycle peak, fully 2/3 of CAT's profits came from mining and oil&gas and related activities, versus about 40% today.”

Despite mining being currently below peak levels, analysts anticipate a need for more energy-efficient and automated capacity to meet evolving decarbonization and efficiency goals. This could lead to robust earnings for Caterpillar, with projections of at least $35 per share as commodity infrastructure is rebuilt.

Moreover, the transition to greener energy solutions is expected to increase the demand for mined commodities such as lithium, cobalt, and copper. Caterpillar's decreased exposure to coal, now constituting less than 5% of its mining revenue, positions it favorably within this shift towards more sustainable energy sources.

Also, recent concerns regarding dealer inventory levels, which have seen significant increases in recent years, are deemed “overdone” by Jefferies. The investment bank foresees a normalization of inventory patterns, both overall and seasonally, with Caterpillar's dealers historically building up inventory in the first quarter and reducing it throughout the rest of the year.

Looking at the broader cycle, Caterpillar is one of the few large-cap industrials not trading at the peak of its historical valuation range.

Jefferies suggests that a new mining cycle could potentially double Caterpillar's Resource Industries (RI) revenues and add $5-7 to its earnings per share (EPS). This, coupled with a replacement cycle in energy and positive catalysts from global infrastructure spending “would provide additional upside, in our view,” according to analysts.