Caterpillar Inc. (NYSE:CAT) shares are up more than 7.37% this year and recently increased 2.01% or $3.33 to settle at $169.20. Deere & Company (NYSE:DE), on the other hand, is up 7.00% year to date as of 01/10/2018. It currently trades at $167.46 and has returned 4.90% during the past week.

Caterpillar Inc. (NYSE:CAT) and Deere & Company (NYSE:DE) are the two most active stocks in the Farm & Construction Machinery industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

**Growth**

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect CAT to grow earnings at a 40.08% annual rate over the next 5 years. Comparatively, DE is expected to grow at a 19.34% annual rate. All else equal, CAT’s higher growth rate would imply a greater potential for capital appreciation.

**Profitability and Returns**

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 19.4% for Deere & Company (DE). CAT’s ROI is 0.60% while DE has a ROI of 6.50%. The interpretation is that DE’s business generates a higher return on investment than CAT’s.

**Cash Flow **

If there’s one thing investors care more about than earnings, it’s cash flow. CAT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.44. Comparatively, DE’s free cash flow per share was +1.40. On a percent-of-sales basis, CAT’s free cash flow was 0.68% while DE converted 1.52% of its revenues into cash flow. This means that, for a given level of sales, DE is able to generate more free cash flow for investors.

**Liquidity and Financial Risk**

CAT’s debt-to-equity ratio is 2.30 versus a D/E of 4.19 for DE. DE is therefore the more solvent of the two companies, and has lower financial risk.

**Valuation**

CAT trades at a forward P/E of 21.33, a P/B of 6.42, and a P/S of 2.35, compared to a forward P/E of 17.28, a P/B of 5.63, and a P/S of 1.81 for DE. CAT is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

**Analyst Price Targets and Opinions**

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. CAT is currently priced at a 12.69% to its one-year price target of 150.14. Comparatively, DE is 6.34% relative to its price target of 157.48. This suggests that DE is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.50 for CAT and 2.30 for DE, which implies that analysts are more bullish on the outlook for CAT.

**Risk and Volatility**

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. CAT has a beta of 1.26 and DE’s beta is 0.75. DE’s shares are therefore the less volatile of the two stocks.

**Insider Activity and Investor Sentiment**

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. CAT has a short ratio of 3.35 compared to a short interest of 4.24 for DE. This implies that the market is currently less bearish on the outlook for CAT.

**Summary**

Deere & Company (NYSE:DE) beats Caterpillar Inc. (NYSE:CAT) on a total of 10 of the 14 factors compared between the two stocks. DE is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, DE is the cheaper of the two stocks on an earnings, book value and sales basis, DE is more undervalued relative to its price target. Finally, BG has better sentiment signals based on short interest.