Are Caterpillar Shares Ready to CLIMB Again?

Going into Caterpillar’s (NYSE:CAT) Q2 earnings release on July 25, 2012 average analyst expectations from Thomson Reuters were for EPS of $2.28 with revenue of $17.1 Billion.  Despite an overabundance of gloom and doom, the Company posted both record earnings at $2.54 EPS and revenue at $17.34 Billion.  These numbers represent some pretty hefty increases over the corresponding period in 2011 – a 22% increase in revenue and a 67% increase in earnings.

Even with such stellar results, some investors are wondering what to do as management commentary provided a glass half full/half empty scenario.  On the one hand, Caterpillar CEO Doug Oberhelman predicted the global economy would “definitely get better” in 2013 and raised their 2012 profit forecast.  On the other hand, they lowered sales guidance for 2012 due to both ubiquitous global economic concerns as well as currency volatility.  So which half of the glass should you trust?  Is Caterpillar right now a BUY, a WAIT and SEE, or a STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

C = Catalyst for a Stock’s Movement

Because of their dominant presence in global construction, CAT is a bellwether of general global health.  The acquisition of Bucyrus makes them a heavy-hitter in mining equipment as well and any positive signals about both mining and construction activity will be good for CAT.  This is especially the case with commodity prices which have many experts predicting hard times for commodity miners going forward.  If you follow the Asia Pacific business news you know every day another expert jumps on the corpse of Australia’s mining boom as the price of iron ore drops and apparently no one anywhere in the world will need steel for anything in the coming horse and carriage world.

H = High Quality Pipeline

With its enhanced presence in global mining equipment with Bucyrus, expect to see a stream of new product introductions for mines.  At the upcoming MINExpo, Caterpillar is slated to unveil several new mining systems and machines.  In addition, CAT is aggressively expanding it production capacity through both upgrading existing facilities and building new facilities, especially in emerging markets

E = Equity to Debt Ratio is Close to Zero

This is the metric that should put a wrinkle of worry on the brow of any conservative investor.  Caterpillar’s debt to equity ratio is 2.46 or 246%.  Their 10-Q SEC filing for the quarter shows $2.21 Billion cash and cash equivalents with total debt of $28,879 Billion.  The total debt calculation includes $4,455 Billion in Short Term Debt; $18,092 Billion in long term debt; $5,739 Billion in current maturities of long term debt; and $593 Million in deferred income taxes and other liabilities.

A = A Level Management Runs the Company

After stumbling badly in the aftermath of the Great Recession, Caterpillar management has done an admirable job of recovering.  You may recall the company cut 33.000 jobs, closed plants, and reported heavy profit losses.  While market news has highlighted the worst, Caterpillar in the last two years has seen increasing demand for heavy equipment from emerging market countries that apparently are unaware they are in a global crisis.  CAT is building new plants and expanding existing ones.  Caterpillar’s order backlog at the end of FY 2011 stood at a record $29.8 Billion.

S = Support is Provided by Institutional Investors & Company Insiders

Caterpillar has 65.77% institutional ownership.  The top five institutional holders are Vanguard, State Farm Insurance, BlackRock, Fidelity, and State Street.  Insider ownership is at 0.21% and over the last several months the majority of insider transactions have been acquisitions  via non open market transactions – usually options exercise — and purchases.

E = Earnings are Increasing Quarter over Quarter

After showing a drop from $1.91 EPS in Q 1 of 2011 to $1.57 in Q 2, earnings have increased every quarter since.  This pattern of positive earnings growth has been constant over the last two years.

T = Trends Support the Industry in which the Company Operates

If you believe in emerging markets, Caterpillar is right there at the forefront of meeting the increasing equipment demands as these countries seek greater urbanization and industrialization.  Investors tend to restrict their thinking of emerging markets to China and India, forgetting about the rest of the Asian region and the entire continent of Africa which as you know is rapidly expanding its mining capability.  In short, despite the troubles in Europe, much of the world’s population is seeing increased income and with it a rise in the need for energy and materials resources for infrastructure developments required by a growing and increasingly urbanized middle class.


Short of a global recession, Caterpillar stands to benefit substantially from global recovery, which for much of the world is actually happening.  The US, China, Canada, and Australia may be slowing to varying degrees, but all are still showing positive GDP growth.  The elephant in Caterpillar’s optimistic room, however, is credit.  Caterpillar equipment is expensive and with low interest rates in much of the world, CAT has benefited from increased credit availability.  While the likelihood of another Lehman-like event producing another global credit freeze is debatable, that possibility alone is enough to make risk averse and conservative investors put CAT in the STAY AWAY box.

For those with higher risk appetites, Caterpillar’s share price is down about 25% for the first half of 2012, despite solid performance.  When you read the morning business news you may feel like crawling back into bed, but think back to late 2008 and early 2009.  Despite the wall of worry, there are glimmers of hope as US housing prices appear to have stabilized and housing construction begins to creep up, albeit slowly.  With increasing prospects for a gradually improving global recovery, CAT may merit a move from a WAIT and SEE list to a BUY list.

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