Will Caterpillar Ever Emerge From its Cocoon?

Kathleen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Caterpillar (NYSE: CAT), is well-known as a mining and construction equipment manufacturing giant. Last September, Caterpillar announced that it was reducing its growth and profit forecast for the next three years. Among other reasons, CAT’s concerns for the reduction were Eurozone debt issues and the global economic slowdown’s impact on the mining and construction sector.

Investors reacted unfavorably to the announcement, and CAT’s stock took a plunge as it dropped ~8.5% within 10 days after the announcement. Caterpillar has yet to recover from the reaction to its lowered expectations. In fact, CAT stock has lost around 20% of its value in the last six months. However, positive future prospects have some analysts rating CAT a buy.

Recent Earnings May Signify a Metamorphosis

In parts of its global operations, Caterpillar has been experiencing declining sales orders. However, the previous quarterly earnings have improved in North America. CAT’s recent third quarter results show that it recorded a $1.7 billion profit. This compares with a $1.14 billion profit reported during the same period in 2011. Caterpillar’s revenue increased by 5% in the quarter reported a year ago. It’s also significant that in the United States, housing is beginning to stabilize.  This means that housing construction will probably begin to increase beginning in 2013. A boost in housing will undoubtedly increase Caterpillar’s bottom line.

Metrics in the Construction Industry

Caterpillar (NYSE: CAT) is one of the largest construction industry companies in the world. However, the construction industry has other massive competitors like Joy Global (NYSE: JOY), CNH Global (NYSE: CNH) and Deere & Company (NYSE: DE). None of these companies have been unscathed by current economic conditions, but some are starting to emerge. Like Caterpillar, Joy Global and CNH Global also reported increases in their net income compared to the corresponding quarters in the previous year. Construction companies have been hit in the economic downturn that started in 2007 due to the slump in infrastructure spending. However, this slump has started to turn around. Major construction companies saw their net incomes rise over the prior year. The recent quarterly sales for CNH Global lag behind Caterpillar with a drastic decline of 21%. 

One significant reason for growth within the industry is development in nations like China and India. Caterpillar and Joy Global are major providers of mining equipment in China. China is rapidly expanding its mining of minerals for electronics, power, and concrete. Mining and construction companies that have Asia-Pacific market shares are growing as these nations continue to build roads, airports, sewer systems, power plants, and infrastructure. CNH Global’s sales operations within the Asia-Pacific region and North America were affected by a downdraft. Investors are waiting for Deere & Company’s fourth quarter earnings results scheduled to be released on November 21. Its last quarter results missed expectations on a wider scale. Deere pays a dividend yield of 2.2% compared to Caterpillar’s 2.45%.

On a valuation basis, Caterpillar is preferred over CNH Global, Joy Global, and Deere & Company. Caterpillar is globally diversified and well-managed. Though its earnings forecast may not improve over the next few quarters based on its initial warnings, the future growth of the global economy is a definite boost for all companies within the industry. Investors have good reason to be confident in CAT’s future. Others, however, would like to see Caterpillar completely emerge from its financial cocoon. They want to watch the mining and construction company’s values soar before making an investment. 

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Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in the Fool’s brand new report. Just click here to access it now.

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