Caterpillar Stock: Buy, Sell, or Hold?

Longtime Caterpillar (NYSE: CAT) shareholders who have ever wondered what it's like to drive one of the company's flagship bulldozers likely got a similar experience through the stock's earth-moving 186% return in the past five years. Despite a volatile macroeconomic environment, the industrial giant has delivered record earnings through its diversified global footprint and impressive strategic execution.

On the other hand, the stock has hit a bump in the road and is currently under pressure, down about 16% from its 52-week high amid some muted sales guidance for 2025. Does this sell-off represent a new buying opportunity to scoop up shares, or is it a sign to dump the stock before the ground caves in?

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Let's discuss what to do with shares of Caterpillar.

The case to buy or hold Caterpillar stock

Caterpillar is recognized as the world's leading manufacturer of construction and mining equipment, renowned for its iconic yellow heavy-duty machinery. The company's products, including excavators, giant trucks, specialized engines, and industrial power systems, are considered essential in multiple industries and have a well-deserved reputation for durability.

A long history of innovation has continued with a major effort to integrate more high-tech features and digital connectivity across its lineup. The strategy to introduce more autonomous options, electrified powertrains, and even artificial intelligence (AI) capabilities has helped to diversify the business.

The impact was evident in 2024 when steps toward financial efficiency to support margins helped push full-year adjusted earnings per share (EPS) up by 3% to $21.90, marking a company record. This was achieved even as total revenue slipped by 5% compared to 2023 balancing weakness in demand from China, alongside mixed trends in North American construction still dealing with high interest rates.

Image source: Getty Images.

The outlook for 2025 remains sluggish, with management guiding for another slight decline in full-year sales. According to Wall Street analysts tracked by Yahoo! Finance, 2025 EPS is projected to fall by 6.5% to $20.47.

Nevertheless, the bigger takeaway is a sense of overall fundamental stability. Caterpillar is still generating billions in free cash flow, with management projecting optimism in its ability to return to profitable growth over time.

Investors who are confident that the current headwinds are simply a bump in the road have plenty of reasons to stick with Caterpillar as a blue chip stock for the long run. A scenario where macroeconomic conditions strengthen could be the catalyst needed for the company to outperform expectations and send the stock to a new all-time high.

Data source: Yahoo Finance. YOY = year over year.

The case to sell Caterpillar stock

Investors typically look to buy stocks that present improving prospects. In this case, the latest update from Caterpillar left a lot to be desired, at a time when the market is facing a new round of uncertainty.

While details have not been confirmed, proposed tariffs by the Trump administration on steel and aluminum have the potential to disrupt Caterpillar's manufacturing supply chain, mentioned during the fourth-quarter earnings conference call as a development the company is watching closely. The repercussions could extend into the broader business environment if customer demand slows as a response to an escalating trade war.

All this is against the backdrop of Caterpillar's valuation. Caterpillar shares are trading at a forward price-to-earnings (P/E) ratio of 17 times its consensus 2025 EPS, a level that matches the five-year average for the earnings multiple, covering a period with stronger growth. One interpretation is that the stock could be overvalued with further room to fall.

Investors concerned that Caterpillar may struggle for an extended period as its outlook deteriorates could consider selling the stock or at least avoiding it.

CAT PE Ratio (Forward) data by YCharts

Decision time: A wait-and-see approach

There's a lot to like about Caterpillar as an industrial sector leader that has proven itself more than capable of navigating various market cycles.

That said, I just don't see enough good news to jump in and buy the stock with confidence for a rebound anytime soon. Current shareholders can likely continue holding the stock looking ahead to the next few quarterly updates for signs of stronger trends. Meanwhile, investors sitting on the sidelines may find better opportunities elsewhere in the stock market right now.

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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.