Caterpillar Inc. Is Finally Turning Around

With a solid earnings beat, management at Caterpillar is showing that it remains dedicated to improving shareholder value and long-term growth.

Jan 28, 2014 at 7:00AM

Heavy machinery manufacturer Caterpillar (NYSE:CAT), often labeled one of the "dogs of the Dow," rose significantly on Monday after the company announced better than expected earnings results. The company also announced an impressive stock repurchase program.

On the heels of the strong report, Caterpillar now appears to be a viable consideration for long-term growth. The company's report also bodes well for smaller competitors like Joy Global (NYSE:JOY) and Deere & Company (NYSE:DE).

Solid earnings beat
The company announced earnings for the fourth quarter of fiscal 2013 that represented a significant decline on a year-over-year basis. Revenue declined approximately 10% in the quarter, to $14.4 billion from 2012's $16.07 billion. The large drop in revenue was attributed mostly due to the drastic slowdown in the company's mining machinery segment.

However, diluted earnings per share did increase on a year-over-year basis 48% to $1.54 from 2012's comparable quarter profit of $1.04. Without the addition of two major one-time events in 2012, however, profit still climbed $0.08 in the quarter.

Caterpillar did manage to significantly beat the average analyst estimate on both the top and bottom lines. The company's revenue of $14.4 billion was way above the average estimate of $13.61 billion. However, even more impressive was Caterpillar's EPS beat, which came in $1.54, or $0.26 better than the expected $1.28.

Shares of Caterpillar rallied over 6% in pre-market trading and dragged peers Joy Global and Deere & Company higher as well.

Strong guidance
Perhaps even more confidence-inspiring for investors was management's guidance for fiscal 2014, which seemed to confirm that the world is not ending for Caterpillar, and by indirect extension peers like Joy Global and Deere & Company.

Management expects 2014 sales to be similar to 2013 sales -- in a plus-or-minus-5% range of $56 billion. Profit is expected to be around $5.85 per share, which excludes restructuring costs of approximately $0.55 in fiscal 2014. Both of these estimates compare favorably to the full-year-average estimates, which stand at revenue of $55.18 billion and EPS of $5.80. 

For comparison, analysts expect Joy Global to experience a revenue decline of 26% and an EPS decline of 46% for the fiscal year ending October 2014. Similarly, Deere & Company is not expected to perform much better in the fiscal year ending October 2014; revenue is projected to decline 3.5% and EPS is projected to decline 8.3%. 

So far, the bigger company, Caterpillar, looks to set to outperform its smaller competitors in 2014.

What's behind the surprise?
In the company's earnings release, CEO Doug Oberhelman explained, "We see signs of improvement in the world economy, which should be positive for sales in our Construction Industries and Power Systems segments." 

These strengths, combined with only a slight expected decrease in capital expenditures from mining companies in 2014, are the major reasons for Caterpillar's projected revenue stabilization in 2014. Although the numbers do not represent robust revenue growth, the year is shaping up to be much better than 2013, in which Caterpillar experienced massive revenue declines. Additionally, company management appears to be positioning for the years ahead when sales growth returns to robust levels. 

Also, management announced an expansion to its existing share repurchase program. The company's current $7.5 billion stock buyback program is expected to end soon as Caterpillar positions to buy back the remaining $1.7 billion under the program sooner than expected, in the first quarter of 2014. 

However, the board of directors also approved an additional $10 billion share buyback program that extends out to 2018. Oberhelman explained, "The completion of our previous program and the decision to announce a new $10 billion program are a result of our record cash flow, the strength of our balance sheet and our confidence in the long term future of Caterpillar." 

A turnaround?
Caterpillar had a rough 2013 in many regards. Thankfully, 2014 is shaping up to be a bit better for the company and its shareholders. With revenue expected to stabilize for the most part, EPS trends moving in the right direction, and an aggressive buyback plan already set in motion, the time seems right to consider Caterpillar for the long term.

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