Will Caterpillar Make a Comeback in 2013?

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Shares of Caterpillar (NYSE: CAT) haven’t perform well during the year, even though the company’s revenues and profitability rallied. Will the company’s stock bounce back in 2013? Let’s examine some key factors that might contribute to Caterpillar’s rally during the last quarter of 2012 and 2013.

The chart below shows the developments of S&P 500 index and Caterpillar in 2012. The prices are normalized to the beginning of the January 2012. As seen below, the S&P 500 has only increased by 11.8% year-to-date; shares of Caterpillar have declined 5.6%.

<img src="/media/images/user_12845/caterpillar-inc-cat-sp500-2012-dec_large.jpg" />

Despite the decline in the company’s stock, Caterpillar is still showing progress in its operating profitability. The chart below shows the developments of the annual operating profitability of Caterpillar between 2009 and 2012 (for 2012 I have estimated the company’s profitability based on the three quarterly reports of the company and an estimate for the fourth quarter; the latter is based on the 2011 fourth quarter results augmented by a 10% growth). The chart shows the upward trend in the company’s profitability in recent years.

<img src="/media/images/user_12845/caterpillar-operrating-profit-2009-2012_large.jpg" />

If the company’s profitability and revenues continue to rally in 2013 it could eventually reflect in the company’s stock. Moreover, based on this projection the company’s revenues are likely to have increased during 2012 by nearly 14% compared to 2011.

Let’s examine some factors that could contribute to the company’s growth in 2013. 

Is there a change in the investment policy of on the federal level?

According to the recent GDP report for the third quarter of 2012, real non-residential fixed investment declined by 2.2%; conversely, real residential fixed investment rose by 14.2%. Nonetheless, the federal government consumption and gross investment rose by 9.5% in the third quarter of 2012 compared to a 0.2% drop in the second quarter. These findings suggest a rise in state and local investment during the third quarter, which could imply a rise in Caterpillar’s revenues.

Moreover, according to the recent federal budget outlay (pdf format), during the past couple of months (October and November) the “Total--Federal Highway Administration” provision reached $14,187 million compared to $8,054 million in the same period in 2011. The rise in this provision could imply an increase in government spending in highway infrastructure – one of the main business sectors of Caterpillar.

The decline in government debt during recent months may also suggest a drop in government spending, including investments. In regards to infrastructure, during the fiscal year of 2012 the federal government spent only $490 million on transportation infrastructure compared to $1,063 million during the same time last year.

The FOMC has recently decided to expand its asset purchase program to include long term treasuries: starting January 2013 the Fed's asset purchase program will consist of purchasing mortgage backed securities at a pace of $40 billion per month and long-term treasury securities at a pace of $45 billion per month. This purchase program could also lead to higher growth in the U.S economy, including in the construction sector; a growth in this sector could lead to higher revenues for Caterpillar.  

Is The Housing Market on the Rise?

In the U.S the recent housing data suggests that the housing market is on the rise. According to the recent housing starts report (or see here the pdf full report), housing starts rose during October by 3.6% and by 41.9% compared to October 2011. On the other hand, new home sales edged down by 0.3% during October and increased by 17.2% compared to October 2011. 

Bush Tax Cuts could expire by the end of 2012

As of the recent quarter the company paid a dividend of $0.52 per share, which represents an annual yield of 2.36%. This dividend payment might eventually pull back the demand for this company’s stock due to the potential expiration of the Bush Tax Cuts.  The Bush Tax Cuts have included a low 15% tax on divided. Once the tax cuts expire on Dec. 31, the tax on dividends will rise to a rate of as high as 43%. It’s still unclear what will be of the Bush Tax Cuts, as Congress hasn’t reached a decision regarding the multi-year deficit reduction plan.  

The expiry of the Bush Tax Cuts might hurt Caterpillar. The company has been paying a slightly higher divided yield than similar companies in related fields:  Caterpillar paid a quarterly divided of $0.52 per share, which comes to an annual yield of 2.34%. In comparison, Cummins Inc. (NYSE: CMI) only paid a quarterly divided of $0.5 per share, which is an annual yield of 1.87%; Deere & Company (NYSE: DE) offered a quarterly divided of $0.46 per share, which represents an annual yield of 2.14%.

The Fiscal Cliff and Obama’s Infrastructure Spending

It’s still unclear what will be of the U.S federal budget and the extent of the spending cuts and tax hikes. It’s worth considering that President Obama is trying to expand government spending in infrastructure. If this plan will come into play it could also expand the industry Caterpillar works in, and thus might also help company revenues grow.

Rebuilding Sandy’s Damage

The damage done by Hurricane Sandy is estimated at nearly $20 billion. Rebuilding the housing and infrastructure is likely to be a long and slow process. Caterpillar might benefit by taking part in this process.

The bottom line: Caterpillar might show additional growth in revenues in the U.S., which could eventually positively affect the company’s stock. Once the uncertainty around the fiscal cliff dissipates it will be clearer the extent of the potential growth the company might have in 2013.   

For further Reading see: Why Caterpillar isn’t pulling up? Just blame it on the Oil

Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.


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