Caterpillar stock: Rising from the rubble

With earnings scaled down by the recession, will the stock continue to pick up with the recovery?

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Beth Kowitt, reporter

bannister.03.jpg
The Bear: Barry Bannister, Stifel Nicolaus
cat.mkw.gif
windau.03.jpg
The Bull: Jeff Windau, Edward Jones
CDs & Money Market
MMA 0.39%
$10K MMA 0.35%
6 month CD 0.35%
1 yr CD 0.67%
5 yr CD 1.38%

Find personalized rates:
 

Rates provided by Bankrate.com.

NEW YORK (Fortune) -- The maker of big machinery soared as construction boomed and commodity prices skyrocketed, boosting mining and oil drilling. When the economy tanked, Caterpillar saw sales slump, leading to workforce and production cuts.

Yet the stock has been on a tear since July, and even as the company reported third-quarter earnings 53% below a year ago, executives said the worst was over. Are they right, or is Caterpillar (CAT, Fortune 500) in a rut?

The Bear: Barry Bannister, Stifel Nicolaus

With Caterpillar, we care about big machines used in U.S. nonresidential construction, commodity-extraction machines, and engines used in oil and gas and power generation. Everything else is just wallpaper.

Demand for big machines in energy and mining is peaking, so next year they won't give you additional earnings growth. Demand for heavy machines in U.S. construction is likely to remain weak at least until late 2010.

The economic stimulus bill is not going to provide much of a boost because infrastructure spending was less than 10% of the package, and states are so strapped for cash that they can't start big projects.

The company is much bigger now in sales for services, which takes away some of your downside. They hedged themselves to avoid a disastrous year, but it hurts their upside when things start to recover. Also, Cat's recoveries are U-shaped, not V-shaped, so even when recessions end Cat doesn't recover the first year typically.

Cat is emphasizing emerging markets and light equipment, which aren't nearly as profitable as heavy-machine sales. It's talking about introducing a separate line with a separate distribution for sales into emerging markets. Building out a second low-brand for the entry-level market is not very profitable. If Caterpillar wants the market share of emerging market competitors, they're not going to go out of business without taking the industry down to a zero margin or a loss.

So if Cat hangs its hat on those areas in 2010, it may disappoint on profit margins.

The Bull: Jeff Windau, Edward Jones

In emerging markets, we see growing populations, rising incomes, more urbanization, and increasing trade. These factors drive the need for infrastructure. Among machinery companies, Caterpillar is the best positioned to take advantage of the global infrastructure build-out. It's increased its international business, with about 60% of sales now outside North America, which gives it a much broader base. Of course all of the developed nations have a significant amount of infrastructure that needs to be maintained as well.

It also has one of the strongest dealer networks in the industry. They have 180 dealers serving customers around the world which is a significant advantage when it comes to product support.

Furthermore, we like that Caterpillar is expanding its integrated services business. Services, including aftermarket parts and financing, were about 50% of third quarter sales. While we expect that number to decline as new equipment sales come back, these services are important to customers and help the business manage through economic cycles.

Although sales and earnings have significantly declined this year, we feel we're close to a cyclical bottom. As global stimulus spending kicks in and the world economy recovers, we could see several years of healthy growth. As a result, we feel it's an attractive time for long-term investors to get into the stock. To top of page

Company Price Change % Change
Bank of America Corp... 16.13 -0.26 -1.59%
Facebook Inc 59.72 -0.01 -0.02%
Yahoo! Inc 36.35 2.14 6.26%
Intel Corp 26.93 0.16 0.60%
Alcoa Inc 13.42 0.37 2.84%
Data as of Apr 16
Index Last Change % Change
Dow 16,424.85 162.29 1.00%
Nasdaq 4,086.23 52.06 1.29%
S&P 500 1,862.31 19.33 1.05%
Treasuries 2.64 0.01 0.34%
Data as of 4:52am ET
More Galleries
8 CEOs who took a pay cut in 2013 Median CEO pay inched up 9% in 2013 to $13.9 million. But not everyone got a bump last year. Here are eight CEOs who missed out. More
7 businesses Amazon wants to shake up From industrial supplies to educational software, Amazon is about more than just retail and books. More
Don't miss these Tax Day deals From massages and paper shredding to cookies and queso, celebrate the end of tax season with these Tax Day freebies and discounts. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.