Caterpillar, Inc. Is Showing Signs of Recovery, but Is Now the Time to Buy?

Caterpillar's product floor. Source: Caterpillar.

What: Shares of Caterpillar (NYSE: CAT  ) initially popped more than 5% higher on Monday after the company released its fourth-quarter results that beat analyst expectations. On the top line, Caterpillar's revenue fell 10% to $14.4 billion in the fourth quarter, which was still ahead of analysts' expectations of $13.6 billion, according to Thomson Reuters estimates. On Caterpillar's bottom line, it posted fourth-quarter profits of $1 billion, or $1.54 per share, which was far ahead of its last year's mark of $697 million, or $1.04 per share -- more details on that shortly.  

Looking at the company's full-year results, it's clear that it has been a rough patch for Caterpillar and its investors. Over the past year and a half, Caterpillar's mining equipment business has faced extreme weakness in demand as metal prices plunged and customers' project developments slowed or were canceled in some cases. As a result, Caterpillar's mining equipment business took a whack and contributed to a 16% drop in full-year revenues and a profit per-share drop from $8.48 in 2012 to $5.75 in 2013. Those are the cold hard numbers, but here are some things to consider.

Caterpillar's mining equipment has faced weak demand. Source: Caterpillar.

So what: The first thing to explain is Caterpillar's drastic improvement in its fourth-quarter profits, which went from $1.04 per share in the fourth quarter of 2012 to $1.54 in the most recent fourth quarter. While the improvement is reason for investors to cheer, keep in mind that in the fourth quarter of 2012 the company had a goodwill impairment charge of $580 million, or $0.87 per share. On a positive side of things, it also recorded a $300 million tax settlement, or $0.45 per share. Excluding those two items, its $1.54-per-share profit in the last quarter was an $0.08-per-share improvement.

More importantly, another factor for investors to be happy with is the company's cost-reduction strategies that included a combined $1.2 billion reduction in costs from manufacturing; sales, general, and administrative; and research and development. Caterpillar also decreased its global workforce by 9,703, as of Dec. 31, 2013, and the company reduced its manufacturing and power systems inventory by $2.9 billion, which helped increase its operating cash flow to $9.0 in 2013, a record and $4.8 billion increase from 2012.

That enabled Caterpillar to end the year with $6.1 billion in cash, $2 billion of repurchased stock, and an increase in the quarterly dividend by 15%. Also, with the shares repurchased during the year, it completed a previous repurchase program; Caterpillar's board of directors authorized a new $10 billion share repurchase plan that will continue returning value to shareholders during a time of economic headwinds and reduced growth. Investors should also note that at the end of 2013 Caterpillar reduced its manufacturing and power systems debt-to-capital ratio by almost eight percentage points, from 37.4% to 29.7% -- its best level in more than 25 years.

Now what: Looking ahead, Caterpillar expects sales and revenues in 2014 to be very similar to those in 2013, around $56 billion. In 2014, Caterpillar will have some costs attributed to restructuring that will impact after-tax profits between $0.50 and $0.60 per share. Excluding those restructuring charges, the company forecasts its profits in 2014 to reach $5.85 per share.

Caterpillar isn't a stock I'll be buying into yet, although it will remain on my watch list for a potential long-term play. There are encouraging signs in the world economy and in the mining sector that can give investors optimism, but there is a great deal of uncertainty as well, which will keep me on the sidelines, despite the fact that the company's cost-reduction strategies, stronger cash flow, increased dividend, and new share repurchase program are great silver linings.

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