Why Caterpillar Is Worth a Look

Caterpillar's (NYSE: CAT  ) shares are up about 15% year to date. Bank of America Merrill Lynch thinks it is a buy right now. Fortune has tagged the equipment giant as the most admired company in its industry. What's making the bellwether such a loved company? Its strong fundamentals. Here's a quick take on things you must know about the company.

Solid growth, profitability, and financials
Caterpillar has made a strong comeback from the depths of the economic downturn, posting a 36% (compounded average rate) rise in its top line and more than 100% growth in its bottom line over the past two years. The company has also rewarded shareholders with good returns, evident in an impressive return on equity of 41.6% and a dividend yield of 1.7%.

Caterpillar's total debt-to-equity ratio is pretty high at 258%. But that doesn't really come as a surprise, considering how capital-intensive its business is. With an interest-coverage ratio of 18 times and unlevered free cash flow of more than $3 billion as of Dec. 31, there's enough of a cushion. I also feel a modest dividend payout of 23.5% provides enough margin of safety to investors, given its high debt levels.

Inorganically good
Caterpillar's long-term debt almost doubled last year when it made its biggest acquisition in history -- that of mining-equipment company Bucyrus International. Thanks to the acquisition, Caterpillar has now become a major mining-equipment maker. Its total mining product range has surpassed that of closest competitor Joy Global. To make sure it maintains the leadership position, the company is furiously expanding in markets where Joy already has good presence, the most notable being China. From setting up new facilities to expanding capacity, Caterpillar is working hard in the nation that accounts for nearly three-quarters of the world's underground mining.

The equipment maker is also increasing its presence in other key markets, such as India and Russia. But competition is tough, because peers are eyeing these high-potential markets as well. Last month, Terex (NYSE: TEX  ) partnered with China-based equipment manufacturer Sinomach Heavy Industry to gain a stronger foothold in the nation. Cummins (NYSE: CMI  ) will spend almost half of its projected capital expenditure for the year on international markets, including China, India, Russia, and Africa, among others. Deere (NYSE: DE  ) , too, has woken up to the opportunities in markets like Brazil, foraying into its construction market recently.

Yet, Caterpillar is the leader when it comes to growing globally. The Asia Pacific region is now its second-largest market and is adding a lot of value to the company. Revenue from the region surged a staggering 45% in 2011 from a year prior.

It's much more than mining
Caterpillar is not just about mining. Two other businesses it runs are its rail and engine businesses. The company is taking keen interest in strengthening its diesel locomotives business. With traffic shifting from trucks to rails -- primarily because of high fuel prices -- most railroad companies have announced plans of buying more locomotives. This will naturally be a great opportunity for Caterpillar to get more of its diesel locomotives out in the market. It is already trying hard to give the likes of General Electric a run for their money by increasing its presence in the market.

Caterpillar also makes diesel and natural-gas engines. It announced investments in several new facilities in India, Brazil, and China last year. It also supplies key components to truck maker Navistar International (NYSE: NAV  ) . The two companies, in fact, share a longstanding relationship that includes the joint development of on-highway trucks for the North American and overseas markets. The bond recently got deeper, with plans of a new business venture.

The Foolish bottom line
I feel that two critical strengths pushing Caterpillar so far are great engineering capabilities that enable it to come out with products the world loves and an excellent distribution network that enables it to move those products around the globe. Having done a great job in taking the company to new heights, Caterpillar CEO Doug Oberhelman was rewarded with a whopping 42% hike in pay last year.

Caterpillar is a great company, though its yield is slightly below the average for the Dow. If you're interested in learning more about some higher-yielding stocks, The Motley Fool has compiled a special free report outlining our top nine dependable, dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your complimentary copy today at no cost! Just click here to discover the winners we've picked.

Neha Chamaria does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Cummins. The Motley Fool has a disclosure policy.
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