Caterpillar: What Investors Should Expect This Year

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 our brand new report. Just click here to access it now.

Andrew Tonner: Hi, Fools, Andrew Tonner here. I'm joined today by our Fool.com analyst, Brendan Byrnes. Brendan, let's turn our attention to Caterpillar (NYSE: CAT  ) . It's a company that's had a pretty contentious last three to six months, but going forward what should investors expect for it for the rest of the year, when you look at it?

Brendan Byrnes: Not the strongest overall in Construction Industries, which is one of their three main segments, at the fourth quarter of 2012 but I am confident that this will be much stronger in early 2013. We do have some tailwinds, especially in the form of a strong U.S. housing market, that should help that segment a lot, so enthusiastic about that.

Not as much about Resource Industries, which is Caterpillar's most profitable segment. About 80% of that comes from mining equipment sales, which is by far their highest margin segment, overall. Pretty strong quarter for it, but a lot of that was not driven by new orders. A lot of that was driven by high-quality backlog, and also increased production.

When you're looking at Quarter 1 and Quarter 2 with Caterpillar, especially in the Resource Industries segment, keep an eye on commodity prices especially, which drive miners to make purchases. We know that in Quarter 4, especially toward the end of Quarter 4, new orders were down significantly, so I expect a couple quarters at least of rough sales overall, in the Resource Industries segment.

It's definitely something to watch. I remain bullish, long-term. We've seen companies like GE (NYSE: GE  ) increasingly getting into the mining space because long-term it has an incredible amount of potential. Even a company like Joy Global (NYSE: JOY  ) , a possible buyout target because of the strength of the mining sector long-term, especially in emerging economies, China; and also in Australia which is obviously a big country for mining.

Those are two things to watch. They came out with EPS guidance for 2013 which the range was $7 a share to $9 a share, a very, very wide range. What does that mean for Caterpillar? They're uncertain of the global economy. So much of this company and their fortune is tied to the global economy, so that's definitely something that you have to watch when you're investing in Caterpillar, but at the same time they have retained pricing power.

Obviously they have the brand name, they have quality service networks that allow them to retain pricing power, and they reduced inventories, especially toward the end of 2012, so I'm confident in Caterpillar in 2013. I think it could have a rough start in their biggest, highest-margin segment, Resource Industries, in early 2013, but I do think it still remains an attractively priced stock for the long-term investor that can tolerate short-term volatility when you're talking about 10X earnings.

Attractive for the long-term investor. Short-term, maybe a few headwinds.

Andrew: Yeah, a little ambiguity but at the same time plenty of headwinds to carry it to a successful long-term investment. Brendan, thanks for your insight. Thanks for watching, folks, and we'll see you at Fool.com.


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