Lee Samaha, The Motley Fool

Sat, May 31, 2025, 7:15 AM5 min read

• The heavy machinery maker's retail sales to its end users appear to be in an uptrend.

• Dealer inventory is lower than expected, indicating that sales growth is likely to follow.

• This key metric below will guide the way to increased profitability for Caterpillar.

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Nobody said investing in equities was easy, and that observation certainly holds when examining the investment proposition at Caterpillar (NYSE: CAT) right now. There is a robust case for buying shares of the heavy machinery maker today, but there's one key thing investors will want to see before buying the stock.

Despite a 10% year-over-year decrease in sales in the first quarter and a whopping 27% decline in operating profit, there's still a robust case for buying Caterpillar. It's based on three interconnected factors.

• The company's retail sales data was better than expected in the first quarter and indicates an upturn is coming.

• Its dealers' inventory position in the first quarter suggests a favorable setup for Caterpillar sales for the rest of 2025.

• Management estimates for earnings and cash flow imply the stock is a good value for a company in the trough year of its earnings cycle.

Before supporting these points in detail, it's worth noting that Caterpillar generates the overwhelming majority of its sales through independent dealers to end users. The dealers manage their inventory of equipment, and the sales data in the chart below reflects their sales to end users.

During the first-quarter earnings call in late April, outgoing CEO Jim Umpleby noted, "Machine sales to users were stronger than we expected in the first quarter, resulting in flat machine dealer inventory, versus our expectation for growth in dealer inventory during the quarter."

Caterpillar's retail sales to end users in the construction and energy and transportation segments were in positive growth territory in the first quarter, with only a 10% decline in resource industries (mining and aggregates) pulling down total machine sales (which include construction and resource industries sales) into negative territory.

The better-than-expected end user sales (remember, they represent dealers' sales) led to dealers only increasing inventory by $100 million in the first quarter. By way of comparison, dealers increased inventory by $1.4 billion in the first quarter of 2024.

Given current sales patterns, "dealers are ordering to replenish" according to CEO Joe Creed, giving credence to management's forecast for flat sales in 2025.