Mr. Market may have gone into a tizzy over Caterpillar's (CAT 1.08%) numbers and outlook and sent the stock to its 11-month high last week, but billionaire Jim Chanos isn't impressed. He's still betting against the stock.

While some investors may ignore Chanos' call on the ground that he hasn't seen success yet since he went short Caterpillar in the middle of last year, they should pause to lend him an ear this time. Caterpillar's fourth-quarter earnings were still off the mark, and its guidance should be taken with a pinch of salt considering that it revised its 2013 guidance at least twice through the year.

More importantly, the commodities market is still in the doldrums, so what has changed over just one quarter that makes Caterpillar hopeful for a speedier recovery? It's time to find out whether this is just a dead cat bounce in Caterpillar stock, like Chanos believes, or whether it is the beginning of a turnaround story.

Spot on
Chanos argues that Caterpillar's earnings beat may not make much sense since it was more the result of one-time gains instead of an improvement in operations. He's correct on that one.

Caterpillar earned $1.54 per share as compared to $1.04 in Q4 2012. That's jaw-dropping, but only until you figure out that a couple of big one-time expenses hurt the company's profits last year. Excluding those items, Caterpillar's year-over-year earnings improved only $0.08 per share.

While any improvement, even if small, is good news right now, investors should also remember that Caterpillar bought back shares fervently over the past year. The reduced outstanding share count boosted Caterpillar's fourth-quarter earnings by roughly $0.04 per share. So in effect, its Q4 profitability showed no improvement over 2012, and operating profit actually slipped 10% year over year. So Chanos has a point here.

Why are the bulls raging?
Caterpillar bulls may have found hope in the company's top-line numbers, though. Caterpillar's fourth-quarter revenue slipped 10% year over year compared to Street estimates of a 15% decline. While revenue from its resource industries division (which is 80% mining) slumped 48%, Caterpillar's construction industries and power systems businesses reported 20% and 5% improvement in sales, respectively. While lower mining equipment sales weren't surprising, the growth in other businesses is worth noting.

Unlike peer Manitowoc (MTW 1.42%), which specializes in crane machines that are essential to construction activity, Caterpillar builds loaders and excavators which are primarily used in heavy industries such as mining. So a double-digit-percentage jump in Caterpillar's Q4 construction equipment sales is surprising, especially when Manitowoc's fourth-quarter crane sales declined 8%. That means Caterpillar's dealers (the company primarily sells through its dealership network) are replenishing their inventory – something we haven't seen for several quarters, and which could signal improving end markets.

Higher sales from Caterpillar's power systems business is equally good news, because it was also the largest, and most profitable, division for the company last year. The market for gas engines, turbines, and locomotives remains strong, and should help Caterpillar partially offset low demand for mining equipment. Investors can expect things to get even more exciting from this point since Caterpillar is even looking for acquisition opportunities in 2014 to expand its power systems business.

The real story
But what really pumped up the market's enthusiasm was Caterpillar's outlook for 2014. While the company projects full-year revenue to be within 5% of 2013 revenue ($56 billion), it projects earnings to improve $0.10 per share to $5.85 in 2014. Including restructuring costs, EPS could go down to $5.30 this year.

I'll give you three reasons why there's not much in the guidance to cheer about:

  1. Restructuring costs could be larger if Caterpillar is forced to pare down assets and reduce workforce further on persistent weakness.
  2. Caterpillar's top line may still grow despite a weak mining industry, but its margins will remain under pressure because mining has traditionally been its highest-profit-churning business. That's not good news, considering that Caterpillar expects sales from its resource industries business to decline further in 2014.
  3. Share repurchases are, in a way, boosting Caterpillar's EPS artificially while business conditions remain weak. After a $2 billion buy back in 2013, Caterpillar will repurchase another $1.7 billion worth of shares. That's not all. It has already lined up another buyback program worth $10 billion through 2018. I'd rather like to see Caterpillar's profitability improve on a growing top line than share repurchases.

Foolish takeaway
Remember, the reasons why Chanos shorted Caterpillar last year still hold true. Mining companies are expected to scale down capital expenditure further this year, and China is yet to show any signs of reversal. What's alarming is that the value of Caterpillar's fourth-quarter backlog fell 10% year over year and order rates remain painfully slow. If orders don't pick up, Caterpillar's revenue can't grow. In short, it looks too early to call the bottom, and Caterpillar investors may face disappointment, at least in the near term.