Is Caterpillar’s Stock Still Attractive?

With shares of Caterpillar Inc. (NYSE:CAT) trading at around $97.13, is CAT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Let’s cover the basics before the drama. Q4 net income was down 55 percent, which was due to lower dealer inventories and a $580 million write-down stemming from accounting misconduct at a Chinese subsidiary. Apparently, it’s not that easy to escape drama. Let’s try again. Q4 EPS came in at $1.04 compared to $2.32 one year ago. Q4 revenue declined to $16.10 billion from $17.24 billion. Obviously, the quarter wasn’t that impressive. However, full-year numbers were strong. FY2012 EPS came in at $8.48 versus just $7.40 for 2011. Revenue also increased to $65.90 billion from $60.14 billion. Now let’s get to the drama.

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Caterpillar acquired a Chinese roofing company last year. During that short span of time, this company, known as Siwei, was cooking the books and attempting to cover it up. There are reports that Siwei had been involved in similar practices in the past. If that’s true, then it shows poor research on the part of Caterpillar. Luckily for Caterpillar, it could afford the hit, but only financially. The reputation and trust factor in regards to investors may have been slightly to moderately compromised. That remains to be seen. The stock is up over 1 percent today, but it takes a while for these types of events to play out and sink in. In the meantime, it’s important to note that Caterpillar is predicting a tough year ahead. This warning, combined with the Chinese acquisition debacle, might make it a wonder why the stock is up today. It’s due to earnings, and because analysts are touting this as a buying opportunity. It’s difficult to understand that when the street falls in love with a stock, it’s very difficult for the street to let that stock go.

Let’s take a look at some important numbers for Caterpillar before forming an opinion…

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Caterpillar is weak, which you might not have expected. This company has been using debt to fuel growth. That’s great for the near term, but bad for the long term, especially if the company is pessimistic on demand increases and the economy isn’t on sure footing. The balance sheet is weak. Operating cash flow is $4.76 billion, which would normally be good, but not for a company the size of Caterpillar. If you want to own shares in a conglomerate with quality debt management, a decent balance sheet, and a slightly higher yield, then consider 3M Company (NYSE:MMM).

Debt-To-Equity

Cash

Long-Term Debt

CAT

2.22

$5.69 Billion

$39.85 Billion

UTX

0.86

$4.82 Billion

$23.22 Billion

MMM

0.33

$4.53 Billion

$6.00 Billion

 

T = Technicals on the Stock Chart Are Strong

Caterpillar has outperformed United Technologies Corp. (NYSE:UTX) and 3M Company over a three-year time frame, but it has underperformed both companies over the past year.

1 Month

Year-To-Date

1 Year

3 Year

CAT

9.02%

6.66%

-12.19%

82.40%

UTX

9.35%

9.49%

19.03%

41.09%

MMM

8.08%

8.34%

17.95%

33.16%

 

At $97.13, Caterpillar is currently trading above all its averages.         

50-Day SMA

89.29

100-Day SMA

87.85

200-Day SMA

89.02

 

E = Earnings Have Been Steady

Earnings and revenue have been improving on an annual basis since 2009.  

2007

2008

2009

2010

2011

Revenue ($)in billions

44.96

51.32

32.40

42.59

60.14

Diluted EPS ($)

5.37

5.66

1.43

4.15

7.40

 

We already know what happened this quarter. Now let’s take a look at what happened in previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

15.72

17.24

15.98

17.37

16.44

Diluted EPS ($)

1.71

2.32

2.37

2.54

2.54

 

T = Trends Might Support the Industry

Caterpillar is a leader, not a follower. What this company says about the future reaches far and wide because the company’s strength (or weakness) is a good indication of what’s taking place in the broader economy. Caterpillar feels that the first half of 2013 won’t be as strong as the first half of 2012 and 2011. The good news is that Caterpillar is forecasting growth in the second half of 2013, and that business in China is expected to remain strong.

Conclusion

There are many reasons for investing in Caterpillar right now, but there is no point investing in a company that just made a large error that could have been prevented. This isn’t a good sign, and there are no excuses when it comes to investing. This is also a company that is pessimistic about demand increases.

While Caterpillar isn’t a bad investment, there are many better options out there. You can look at the company’s competitors for a start. You will receive similar dividend payments, similar stock performance (for the most part) and you won’t find such accounting abnormalities.

Caterpillar is a WAIT AND SEE.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.