Growth expectations and risk both play key roles in determining what a “normal” or fair PE ratio should be for any stock. Companies expected to grow faster, or those seen as safer bets, often trade at higher PE ratios than peers with more modest outlooks or riskier profiles.

Right now, Caterpillar trades at a PE ratio of 28.8x, which is notably higher than its industry average of 23.9x and its average peer at 20.2x. However, to get a more complete picture, we look at Simply Wall St’s proprietary “Fair Ratio.” In Caterpillar’s case, this is 42.5x. The Fair Ratio stands out because it goes beyond just peer or sector averages. It incorporates Caterpillar’s expected earnings growth, its profit margins, the company’s market cap, and the specific risks facing the business. In other words, it reflects what is considered reasonable for a company of Caterpillar’s size and profile.

With Caterpillar’s current PE of 28.8x sitting well below the Fair Ratio of 42.5x, the shares may appear undervalued by this measure. This suggests the market might not be fully appreciating the company’s strengths and future growth potential.

Result: UNDERVALUED

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Earlier, we mentioned there’s an even better way to understand valuation, so let’s introduce you to Narratives. A Narrative is simply your story-driven investment thesis, where you connect your view of a company’s business prospects to concrete financial assumptions, such as what you expect for Caterpillar’s revenue, profit margins, and fair value in the future. Rather than relying solely on traditional metrics, Narratives allow you to bring together recent news, your expectations, and the company’s strategy to form a financial forecast that is uniquely yours.

Narratives work by linking your story directly to real numbers, so you can see how believing in a stronger infrastructure boom, or expecting continued margin expansion, affects Caterpillar’s fair value. On Simply Wall St’s Community page, millions of investors are already using Narratives to take control of their investing process by comparing their own fair value estimate to the current price, and dynamically updating their perspectives as new company results or global news are released.

For example, when analysts recently set Caterpillar price targets between $350 and $507, it reflected different Narratives ranging from cautious expectations about tariffs and slowing growth to bullish forecasts for resilient margins and record backlogs. By exploring and creating Narratives, you can clearly see when to buy, hold, or sell, based on the evolving story and your own data-driven view.

Do you think there’s more to the story for Caterpillar? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Companies discussed in this article include CAT.

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