For many investors, 2014 was great. The Dow Jones Industrial Average even closed above 18,000 right before the book was closed on the year, and the S&P 500 continues to hover around 2,000. Despite the overall market's success, there are many stocks that have been left behind, for various reasons. Here is one stock that has struggled recently, and investors without a long-term horizon might be wise to avoid.
Digging a bigger hole
To be honest, there's actually a lot to like about Caterpillar (NYSE:CAT) as an investment, as long as you don't expect market-beating gains this year. Caterpillar is a massive company with reach across the globe; it is the largest or second-largest manufacturer of almost every single product it sells.
The company has an extensive dealer network that management is focused on improving. Under a new plan, Caterpillar believes it will increase sales and service revenue at the dealer level by $9 billion to $18 billion as soon as 2018 -- that's a lot of revenue considering the company's full-year 2013 revenue totaled $55.6 billion.
Also, despite having a rough couple of years plagued by weak mining demand overseas, and thus less demand for its machinery, Caterpillar has proven it can still return significant value to shareholders through share repurchases and dividend increases.
In fact, Caterpillar has paid a cash dividend every year since the company was formed and has paid higher dividends to its shareholders for 21 consecutive years. Through the first nine months of 2014 the company has dished out $1.6 billion of dividends and repurchased $4.2 billion of its stock. As you can see below, Caterpillar has accelerated the value returned to shareholders in recent years, and 2014 was be a record year for return of capital.
Despite those favorable aspects for long-term investors, 2015 isn't expected to be the year Caterpillar rebounds. Here's a look at some key factors that highlight business weakness.
First, let's take a look at how Caterpillar's resource industries segment has performed. As you can see below, as recently as 2012 it was Caterpillar's most profitable business segment, but that changed quickly.
Operating profit generated by Caterpillar's resource industries segment plummeted, and though it seems to have bottomed, it isn't likely to bounce back up in 2015 because of increased carbon emissions standards, which are hurting coal's cost-competitiveness compared to natural gas, and the slowing of China's urbanization, which was a strong driver of construction and mining demand.
Also in the graph above you can see the recent decline in Caterpillar's construction business segment, and looking at the sales figures below, investors should expect a further decline when the fourth-quarter figures are released. That's a bad sign for investors hoping Caterpillar's other two business segments would grow fast enough to help offset a struggling resource industries segment.
What investors need to keep an eye on is Caterpillar's cash flow, which so far has remained strong despite weak mining end markets and slowing sales growth. Also, investors should keep track of what Caterpillar can control, such as its ability to cut costs -- manufacturing costs, SG&A, and R&D expenses were reduced nearly $0.5 billion in the first half of 2014.
If you're attempting to find an unloved company trading at a fair price, while keeping a long-term investing horizon, Caterpillar should certainly be on your watchlist, but don't expect it to beat the market in 2015.
Daniel Miller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
More from The Motley Fool
There Was More to Caterpillar Inc. Stock's 11.6% Jump in December Than You Might Know
One number that Caterpillar reported in December should make you bullish.
Caterpillar Stock Upgraded: What You Need to Know
JPMorgan sees a decade-long upcycle in the mining biz -- and says Caterpillar stock will benefit.
Dow 25,000: Chalk It Up to These 4 Stocks
It only took a few companies to do the lion's share of the work to move the Dow higher by 5,000 points in less than a year.