Purrrrr.

What's that happy, humming, anticipatory sound? It's the noise that Caterpillar (NYSE:CAT) shareholders make when awaiting a good quarter's earnings results. And Caterpillar releases its Q4 and full-year 2005 numbers tomorrow morning.

Wall Street Wisdom:

  • General consensus. Seventeen analysts follow Caterpillar. Eight of them are "cat people" (buy-raters). Nine more have mixed feelings ("holds").
  • Revenues. By and large, analysts expect Cat to post modest 6.6% revenue growth in Q4. $9.14 billion is the target.
  • Earnings. Profits are another matter entirely. Analysts agree that in Q4 2005, Cat bested its Q4 2004 numbers by 41%, raking in $1.10 per share.

Margin watch:
The secret to Cat's net profit success: margins. Despite high energy and raw materials (read: "steel") costs, Cat has managed to keep its gross margin deterioration to a minimum. Meanwhile, it has boosted operational efficiency to capitalize on sales growth, allowing more pennies from each additional dollar to drop to the bottom line.

Marg . %

6/04

9/04

12/04

3/05

6/05

9/05

Gross

24.4

24.3

24.2

23.7

23.6

24

Op.

8.7

9

9.2

9.3

9.6

10

Net

6

6.5

6.7

6.8

7.1

7.3
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Valuation metrics:
Now let's turn to the flip side of the Cat equation: valuation. On a P/E basis, Cat doesn't look terribly expensive at 17 times trailing earnings -- why, the S&P as a whole is selling at 18.5 times. However, when you consider that Cat's earnings are projected to grow just 10% per annum in the long term, the company begins to look a bit pricier. The valuation gets even worse when you realize just how capital-intensive this company is. Because it must make massive capital expenditures quarter after quarter, the company generates only one-third as much free cash flow as its GAAP net profits reflect, giving the firm a price-to-free cash flow ratio of 55.

Competitors:
Cat's competitors include local Deere (NYSE:DE) and foreign rivals Kubota (NYSE:KUB) and CNH (NYSE:CNH).

Fool contributor Rich Smith does not own shares of any company named above.