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Wall Street gave a mixed reaction to Caterpillar's (NYSE: CAT) latest earnings report, and it's about as nuanced as you might expect from a highly cyclical stock. For example, Stifel raised its price target to $350 from $293 previously but lowered the rating on the stock from "buy" to "hold." Meanwhile, TD Cowen raised its price target to $340 from $338 and retained a "buy" rating.

Caterpillar stock is a battleground

The bull-and-bear debate over the stock continues. As mentioned, Wall Street analysts differ significantly on what to expect from Caterpillar, and a large part of that debate boils down to its end-market outlook.

The chart demonstrates that Caterpillar's revenue and profit margin are highly cyclical. If revenue grows more than expected, investors will start pricing in bumper profit growth, and vice versa.

In addition, there's an upward drift in Caterpillar's profit margins and free cash flow (FCF). For example, on its investor day presentation in 2022, management said its FCF through the cycle would be $4 billion to $8 billion, only to upgrade this estimate to $5 billion to $10 billion at the end of 2023.

The bulls take heart from this and point out the upside potential for margin expansion and FCF from ongoing strength in non-residential construction, infrastructure spending, energy, mining, and power industries. Meanwhile, the bears point out that the current valuation puts Caterpillar at more than 23 times the midpoint of the FCF range through the cycle.

Given that the recent results merely saw Caterpillar reiterating its full-year 2024 guidance for sales to be similar to 2023 and FCF to be in the $7.5 billion to $10 billion range, it's fair to argue that there hasn't been any improvement in its end markets overall in the last three months. As such, some caution is needed before buying into the stock at this level.

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Lee Samaha 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.