Caterpillar's 2025 Surge Belies Overvaluation and Margin Erosion

What happened

Caterpillar's stock surged 57.9% in 2025, fueled by revenue growth, a record $39.9 billion backlog, and easing earnings declines as highlighted in recent media. However, SEC filings reveal that through the first nine months of 2025, sales were flat while operating margins fell from 20.9% to 17.5% due to tariffs and weaker price realization. The company maintains robust free cash flow and a solid balance sheet, enabling aggressive share buybacks and dividends. Yet, at approximately 30 times trailing earnings and 19.5 times EV/EBITDA, the stock trades over 140% above its discounted cash flow intrinsic value of around $246 per share. This valuation disconnect suggests the market is pricing in peak-like earnings for a cyclical business facing persistent headwinds.

Implication

The stock's rally reflects optimism on backlog and revenue, but it ignores fundamental erosion from tariffs and pricing pressure that could worsen in a cyclical downturn. With valuation multiples stretched and earnings near peaks, any normalization or external shock could trigger a sharp correction, especially given the policy-sensitive nature of the industry. Aggressive capital returns, while supportive short-term, may limit financial flexibility if margins continue to weaken or demand softens. Monitoring dealer inventory trends, order patterns, and trade policy developments is critical to gauge near-term risks. For prudent investors, waiting for a material pullback toward the DCF anchor or clear margin stabilization is essential before considering new positions.

Thesis delta

The DeepValue report's 'POTENTIAL SELL' thesis remains unchanged; the new article confirms the stock's strong run but does not alter the underlying overvaluation and margin pressures. Despite the positive spin on backlog and earnings, the core issues of cyclical risk and inflated multiples persist, reinforcing the recommendation to trim or avoid. Only a significant price decline toward the low-$300s DCF anchor or sustained margin improvement would shift this stance to a more neutral or bullish view.