Caterpillar had a stellar 2023. Here's why all signs point to another strong year

Published Mon, Jan 8 20246:01 AM EST

Caterpillar outperformed a lackluster industrial sector and kept pace with last year's strong market. We expect more of the same in 2024 as government infrastructure spending ramps up in what's expected to be a lower interest-rate environment. In the final days of 2023, shares of the heavy equipment maker closed at a record high of $298.12 on Dec. 27. While falling modestly in the next two sessions, Caterpillar rose 23.4% in 2023. That surpassed the S & P 500 Industrials ' 16% increase last year and nearly matched the overall S & P 500 index's 24.2% surge in 2023. Club name Caterpillar was last year's ninth-best performer of the 30 stocks that make up the Dow Jones Industrials Average , which gained 13.7% in 2023. CAT YTD mountain Caterpillar (CAT) year-to-date performance Last year's market action was dominated by an extraordinary rally in mega-cap tech stocks, spurred by interest in generative artificial intelligence. Big Tech remains the big story on Wall Street in the early days of 2024 — but for the group's major losses, not gains. We trimmed some tech winners to start the new year as we look to deploy the extra cash in undervalued companies with solid underlying fundamentals. Caterpillar looks prime for the picking on a pullback. If the Federal Reserve follows through and cuts rates later this year, the industrial sector more broadly would benefit. "When you look at the [Magnificent Seven], it's been an extraordinary run. Maybe it's time for them to cool off and buy what you typically buy when the Fed is done" with a tightening cycle, Jim Cramer said recently. "They seem cheap compared to what they can do year-over-year." To be sure, though, Caterpillar is also facing some headwinds in 2024. Shares sank more than 6.5% on Oct. 31 after Caterpillar reported a shrinking backlog exiting the third quarter. The stakes are high when it reports fiscal 2023 fourth-quarter results later this month. Another backlog decline could be interpreted as waning consumer demand. Caterpillar CEO Jim Umpleby shot down that notion, chalking up the Q3 backlog situation to "improving supply chain conditions," adding on October's post-earnings call that "productivity and lead times have improved for many products." Put another way, better supply is allowing Caterpillar to more quickly complete orders and record them as sales. Investors will also be watching dealer inventory levels. The third quarter saw dealer inventories, another forward-looking metric, increase by about $600 million on a sequential basis — driven by strength in construction industries. However, going forward, Caterpillar expects dealer inventories to decline, warning it does not expect the seasonal sales bump typically seen from Q3 to the fourth quarter. Again, though, Umpleby aimed to quell concerns. "Dealers and customers can wait longer to place orders, which has led to a moderation in order rates as expected," Umpleby added. They can wait longer because, as noted above, the conversion time from order to delivery has come down. Besides a better macro backdrop, Caterpillar could also see business pick up in 2024 from increased spending by the U.S. government on infrastructure projects. The influx of federal stimulus, in part, comes from President Joe Biden's Infrastructure Investment and Jobs Act , commonly known as the Bipartisan Infrastructure Law. Signed in late 2021, the plan unlocks over $1 trillion in funds to fix outdated roads, transit systems and various other areas of decay over five years. Caterpillar, a top manufacturer of construction and mining equipment, could be a key beneficiary of the additional funding. As more construction projects pop up, in theory, demand for Caterpillar's machines will rise, too. This should strengthen the company's construction division, one of three main segments for Caterpillar's business. It's worth noting that the Inflation Reduction Act and CHIPS and Science Act should help Caterpillar's financials as well. The onslaught on federal spending was a prime reason the Club first initiated a position in Caterpillar back in January 2023. We're seeing signs that the stimulus is benefitting the firm already. During Caterpillar's stellar second-quarter results last August, construction sales climbed by double-digit percentage points. Management attributed this strength to the "once in a generation" funding for infrastructure overhauls. (Jim Cramer's Charitable Trust is long CAT . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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CAL Fire D6N XL bulldozer excavating fire breaks during joint operations on Camp Pendleton, California, April 30, 2018. Image courtesy Pfc. Drake Nickels / Marine Corps Installations West - Marine Corps Base Camp Pendleton. (Photo by Smith Collection/Gado/Getty Images)

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