Between 2016 and 2018, Caterpillar (NYSE:CAT) earnings more than tripled. Unsurprisingly, the stock price soared. Caterpillar stock started 2016 near $60; it started 2018 roughly one hundred points higher.

There were several factors at play in earnings growth. Easy comparisons helped, certainly. Revenue fell 18% year-over-year in 2016. That was the fourth straight year in which sales declined, a first for the company. Not even during the Great Depression did Caterpillar’s top line stay negative for so long. Those four years of declines also led to a great deal of pent-up demand, which has benefited results over the last nine quarters.

In addition, Caterpillar aggressively cut costs: its headcount shrunk by 20% between the end of 2013 and the end of 2017. Corporate tax reform boosted EPS. Almost everything has gone right of late – but that hardly seems reflected in Caterpillar shares.

Indeed, over the last eighteen months, Caterpillar stock now has declined over 20%. Yet earnings still are expected to grow, if at a slower rate. Caterpillar is guiding for adjusted EPS this year (excluding a one-time tax benefit) of $11.75-$12.75, 5-14% above 2018 levels. Investors don’t seem to care: the CAT stock price touched a 2019 low just week, and now sits at a little over 10x the midpoint of that guidance range.

The issue is that investors aren’t looking at 2019, or 2016. They’re looking at 2020 and beyond. To some investors, that might present an opportunity. To others, it explains why the CAT stock price continues to fall and may have further to go.

The Cyclical CAT

Along with John Deere (NYSE:DE), Caterpillar is one of the most widely-held cyclical stocks. That’s been particularly true this decade. Back in 2012, the company generated nearly $66 billion in revenue. That year, the so-called commodity supercycle driven in part by Chinese growth peaked, and Caterpillar sold billions of dollars of equipment to miners worldwide. Commodity prices collapsed, demand dried up, and the overhang of barely used equipment pressured sales for years.

Indeed, Caterpillar’s Resource Industries segment saw revenue drop by over 70 percent between 2012 and 2016. Operating profit went from over $4 billion to a loss of $1 billion. That business now has recovered – but a $1.6 billion profit in 2018 obviously sits well below early-decade peaks.

That volatility explains, at least in part, why Caterpillar stock looks so cheap at the moment. Investors always know Caterpillar is a cyclical play, but the roller-coaster ride of this decade remains fresh in their memories. In theory, a cyclical stock should see its earnings multiple expand at the bottom as was the case in 2016 when savvy investors started buying CAT stock ahead of its rebound.

Of course, that also means multiples should contract at the top, and it’s the fear that we indeed are at, or near, the top that explains why the CAT stock price sits at barely 10x 2019 earnings per share.

The Cycle Weighs on Caterpillar Stock

To be sure, there are some company-specific factors as well. Caterpillar cited a $70 million direct impact from tariffs just in the first quarter, and trade war fears no doubt have weighed on CAT. Like other American firms including Deere, 3M (NYSE:MMM), and even Apple (NASDAQ:AAPL), the company also cited market share struggles in the Chinese market.

But China only accounts for roughly 10% of Caterpillar revenue. Potential market share issues in one region don’t offset the fact that Caterpillar earnings have soared – or that the company seems to be performing exceedingly well everywhere else.

CAT’s cheap multiple is a function primarily of cyclical worries. To be sure, it’s not alone. Banks like Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM) look cheap. Homebuilders Lennar (NYSE:LEN) and D.R. Horton (NYSE:DHI), too, trade at single-digit multiples, even after solid YTD rallies.

Investors in these stocks, and in Caterpillar, are looking to ahead to looming trouble. That might be a trade war. It might just be the natural end of a U.S. economic expansion heading into its eleventh year. Caterpillar is a more global play. Over half of its sales come from outside North America, but the logic is the same. A slowdown is coming and investors don’t want to own the stocks most likely to be affected.

The Bet on CAT Stock

And so investors aren’t really focused on 2019 results and they’re not going to be. An extra dime or two in 2019 EPS doesn’t matter much, if at all, if those earnings start declining in 2020 anyhow. UBS (NYSE:UBS) made that case last week, cutting its CAT stock price target to $115 while projecting a decrease in earnings next year.

That’s the problem for Caterpillar stock right now: there’s not much Caterpillar can really do. It’s cut costs so significantly of late that there’s probably less room to react if sales do start turning negative. What growth it does muster in 2019 could well be overshadowed, or ignored, amid fears of what comes next. Moreso than other cyclicals, CAT is going to be held hostage to the broader sentiment toward the global economy.

Of course, that’s precisely what makes CAT so interesting, particularly near YTD lows. There is a nice case here for the stock. As Dana Blankenhorn pointed out last month, CAT is an attractive pick for income investors. The dividend already yields 3.3%, and Caterpillar management has promised further hikes going forward.

Those hikes are presumably dependent on some degree of cooperation from the broader economy, but at least for now the dividend is well-covered.

But even a 4% dividend isn’t quite enough to turn bullish. An investor has to trust the global economy to go long CAT, even at these levels. And if an investor does see global macro worries as overdone, there are few better plays than Caterpillar stock.

Another leg up in the global economy and particularly in demand for commodities like minerals, oil and natural gas would allow earnings to keep growing. CAT’s earnings multiple likely would expand as well thanks to increased investor confidence. It’s not unreasonable in that scenario to see Caterpillar stock clearing $200, something like 14-15x adjusted EPS of $14-$15. For what it’s worth, the high Wall Street target price is exactly $200.

It’s not quite that simple but it’s close. CAT is a bet on the global economy being better than feared. It’s not a bet I’m quite willing to take but I can see why other investors might.

As of this writing, Vince Martin has no positions in any securities mentioned.