Why Caterpillar Stock Has Gone Nowhere So Far in 2015

Image: Caterpillar

Investors in heavy-equipment specialist Caterpillar (CAT -0.11%) have to be disappointed with the stock's performance so far in 2015, as the share price has fallen 6% even as many of its Dow Industrials peers have managed to post gains in the first half of the year. With so many challenges on the macroeconomic front, though, Caterpillar has had to endure the low point of the business cycle in many of its key industries. Now that the energy sector has joined the list of key sources of customers in suffering a huge setback, Caterpillar investors are hoping that the stock will finally hit bottom and see some chances of recovery in the near future. Let's look more closely at how Caterpillar has done in 2015 and whether the stock can finally bounce back in the second half of the year and beyond.

Caterpillar: a tale of 2 quarters
Fundamentally, Caterpillar has had a mixed 2015 thus far. The heavy-equipment maker's fourth-quarter results in January showed just how difficult a time the company has faced lately, with revenue from the construction and mining industries posting sales declines of 9% to 10%. Just about the only positive in the report came from the energy sector, and the fact that oil prices had declined during the quarter raised further fears that those gains would evaporate and potentially take away one of the last bastions of strength for Caterpillar. With Caterpillar expecting a nearly 10% decline in sales and a drop of more than 20% in earnings per share for the full 2015 year compared to 2014, investors braced for what seemed like a worst-case scenario.

Yet by April, things at Caterpillar seemed to be a lot better. In its first-quarter results, Caterpillar reported falling revenue from construction and resources, but the energy and transportation segment held its own with roughly flat sales despite the huge plunge in crude oil. More importantly, despite warnings from management that further weakness in energy would likely contribute to weaker overall demand in future quarters, cost-reduction efforts and other attempts to rein in expenses helped send earnings higher. Caterpillar even raised its earnings guidance by a dime per share, and while that was far from enough to restore its bottom line to a solid growth path, it nevertheless encouraged investors looking for Caterpillar to make more efforts to boost its overall profitability.

Better times to come for Caterpillar?
An even more encouraging sign of Caterpillar's long-term optimism came in June, when the company announced that it would boost its dividend. Caterpillar said that it would pay $0.77 per share in quarterly dividends beginning this quarter, up 10% from its previous payout and marking the 22nd consecutive year that the equipment specialist has increased the amount of capital it returns to shareholders through dividends. Even with the expected declines in earnings this quarter, Caterpillar's dividend payout ratio remains at a relatively healthy level of around 65% on a forward basis, and the enhanced yield works out to more than 3.5% based on the current share price.

The real question for Caterpillar is when its customers will have to break down and start spending money again. In the natural resources sector, for instance, mining companies have resisted making big capital expenditures for years in an effort to rein in costs and salvage their earnings prospects. Yet pent-up demand for up-to-date equipment rises year after year, and Caterpillar expects that customers will eventually have to pony up and make new purchases.

For its part, Caterpillar is trying to encourage those purchases sooner rather than later. The company has pushed hard to embrace technology in its equipment, with greater capabilities to collect data for analysis and to automate key mechanical functions that can reduce labor costs and give customers valuable information for their own business operations. By offering ways for its clients to maximize productivity with new equipment compared to older models, Caterpillar hopes to entice greater sales even if industry conditions don't improve as quickly as investors would like.

Will Caterpillar stock catapult higher?
Caterpillar has already incurred most of the expenses it expects to make toward restructuring efforts, leaving more capital available to plow back into research and development and make its equipment more attractive to prospective customers. That's no guarantee that business will come back quickly, as macroeconomic conditions worldwide are still difficult and could lead potential clients to defer purchases even further into the future. Nevertheless, for those who've held out hope for Caterpillar this long, the future looks increasingly bright for the equipment maker.