Why Did Caterpillar Fall Far Behind a Surging Dow in 2013?

Like many of its industrial peers, Caterpillar (NYSE: CAT  ) was hit hard by the financial crisis, but the post-crash market rebound initially seemed to provide a powerful tailwind in the heavy-equipment maker's sails (and sales). Within two years of the end of the Dow Jones Industrial Average's (DJINDICES: ^DJI  ) slide, Caterpillar's stock had surged to a 400% gain -- but this would be a high-water mark for shareholders, who have endured a flat 2013 even as the index and many of its other large-cap components have raced to once-in-a-decade gains:

CAT Total Return Price Chart

CAT Total Return Price data by YCharts.

Why did Caterpillar peter out in 2013? One easy way to find out is to see how its fundamentals have progressed between last year and this one. On that account, Caterpillar has certainly given investors little reason to keep the faith, as nearly every important metric has declined significantly:

Metric

Trailing 12-Month* Result

2012 Result

Change

Revenue

$57.3 billion

$65.9 billion

(13.1%)

Net income

$3.5 billion

$5.7 billion

(38.6%)

Earnings per share

$5.25

$8.48

(38.1%)

Free cash flow

$4.9 billion

$165 million

2,870%

Dividends paid

$1.4 billion

$1.6 billion

(12.5%)

Source: Morningstar. *Includes fourth quarter of 2012, which was reported in early 2013.

While free cash flow certainly looks to have risen impressively over last year's result, we should keep in mind that this was affected by one major change: inventory writedowns (this year is the first since 2009 in which Caterpillar recorded positive inventory totals on its cash flow statement) produced a nearly $5 billion swing over 2012. Caterpillar also boosted its capital expenditure by more than $1 billion from 2011 to 2012 even as operating cash flow declined, and it hasn't boosted that spending again this year.

Caterpillar's forward guidance hasn't given investors much cause for celebration, either, and Wall Street now expects the company to underperform all of its major heavy-machinery peers except for Deere (NYSE: DE  ) , which is slated to lose ground in 2014. Our Foolish analysts have dug deep into Caterpillar's doldrums to figure out why 2013 has been so problematic and whether the company is still worth a spot in portfolios today. Most of the analysis comes to the same conclusion: Caterpillar isn't out of the woods yet.

Contributor Travis Hoium highlights Caterpillar's dwindling guidance and notes that Asian orders for the company's mining equipment imploded in the third quarter. Contributor Rupert Hargreaves points out that Caterpillar's high capital expenditures are now slated to decline significantly from 2012's levels by year-end, and will continue to slide all the way through 2015. Contributor Brendan Byrnes notes that Caterpillar is simply stuck on the wrong side of macroeconomic trends at the moment, while contributor Daniel Jones says Caterpillar has been consistently underperforming peer Joy Global (NYSE: JOY  ) in net-margin terms, and the larger Caterpillar boasts a weaker current ratio and debt-to-equity ratio than Joy Global. Contributor Victor Lai points out that this year of weakness has left Caterpillar with weaker revenue growth, a higher P/E, and a lower dividend yield than the rest of the heavy-equipment industry. Contributor Rich Duprey has been closely watching Caterpillar's ongoing staff cuts, which exceed 13,000 employees, and also provides compelling graphical evidence that the company doesn't have good sales numbers anywhere on the planet right now.

If you weren't sure that Caterpillar's misfortune is heavily tied to mining, or if you think that that mining weaknesses are sure to be short-lived, then there's one graph that should change your mind:

Metals & Minerals Price Index Chart

Metals & Minerals Price Index data by YCharts.

Caterpillar is about more than just mining, of course, but in 2013 it was kept afloat entirely by valuation growth -- its P/E has increased 65% this year, from just under 11 at the start of the year to a P/E of more than 17 today. That's significantly more valuation growth than that experienced by either Joy Global (30% higher) or Deere (a 12% decline during the year), and at the moment Caterpillar's P/E is far higher than that of either competitors (Joy Global's is just under 12 and Deere's is 10). That speaks to greater investor faith, but it could easily point to another weak year ahead -- there's only so much buying investors will do before they decide to wait for a rebound in fundamentals.

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