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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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Daniel Miller

As a Motley Fool Industrial Specialist, I use my marketing and business background in the automotive industry to evaluate major automakers and other large industrial corporations. Follow me on twitter for tweets about stocks, cars, sports, and anything I find amusing.

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9/4/2015 4:00 PM
CAT $73.10 Down -1.35 -1.81%
Caterpillar, Inc. CAPS Rating: ***