NEW YORK (Money Magazine) - Caterpillar's famous yellow-and-black bulldozers, backhoes and tractors move mountains of earth around the world, yet its stock rarely stirs investors.

Over the past five years, its shares returned just 12 percent and have mostly traded in the $40s and $50s. But lately this Dow Jones industrial average component has generated the kind of buzz usually reserved for the next hot stock.

Since early October, Caterpillar's (CAT: Research, Estimates) shares have climbed an astonishing 33 percent. [Caterpillar reported higher fourth-quarter sales Thursday before the bell -- see more.]

Why all the fuss? A new diesel engine that some on Wall Street say will put Cat years ahead of rivals like Cummins and Navistar.

Cat's competitors use a well-known technology (exhaust-gas recirculation) to get emissions of smog-producing nitrogen below the Environmental Protection Agency's new requirements for on-road vehicles. Cat says it has developed a cleaner and more cost-effective process that can also be easily modified to meet the next round of EPA requirements in 2007.

The engine, to be unveiled later this year, will be used in Cat's electric power generation systems, on-road vehicles and heavy machinery, and sold to other manufacturers. Sanford Bernstein analyst Ann Duignan recently called the engine a "huge strategic win" for Caterpillar, labeling the stock a "buy."

Duignan and others also see Cat's heavy-machinery business gaining ground with an economic recovery. Wall Street predicts that profits at Cat will rise 20 percent in 2003 and 66 percent in 2004. "It's the perfect time in the cycle to own Cat," says Carl Domino, co-manager of Northern Large Cap fund.

Not everyone is convinced. For starters, there's no guarantee that Cat's new engine will be a breakthrough. "If this is as good as Cat says it is, few will be able to match it, but we just don't know that for sure yet," says A.G. Edwards' Michael Braig. Even if it does deliver, overall demand for engines still must pick up, something that may not happen until just ahead of the rollout of the 2007 EPA mandates.

Cat also needs an increase in construction activity worldwide to drive its machinery unit -- which makes construction, mining and agricultural equipment, and accounts for 60 percent of the company's total revenue.

The past five years have been tough for Cat and its industry peers as a weak global economy dampened heavy-machinery sales. In 2002, Cat's sales are expected to fall 8 percent to $18.8 billion -- that's down 15 percent from 1998's $21 billion peak. During that same period, Cat's profits will have plunged by 50 percent to $2.10 a share.

Caterpillar     Ticker  CAT  Recent price  $46.50  52-week range  $33 to $60  2003 est. P/E  18  12-month revenue  $20 billion  12-month earnings  $2.18 a share    Note: Data as of Dec. 20, 2002.  Source:  Baseline.

And even though CEO Glen Barton has diversified Cat's product line with faster-growing compact and lightweight gear, shed laggard operations like its agricultural tractor unit and made cost cutting routine, Cat's fortunes are still tied to the economy.

Says Standard & Poor's James Sanders: "The recovery is eventually going to happen, but I don't see it being that significant in 2003."

At a recent $44.50, Caterpillar trades at a price/earnings ratio of 18 based on 2003 estimates (higher than the S&P 500's 17, and above Cat's five-year average of 15.6); it also pays a 3 percent dividend (vs. the S&P 500 average of 1.8 percent).

"Cat has done a lot of appropriate things to gear itself for a changing machinery world," says Braig. But for Caterpillar's stock to turn into a butterfly, it's going to need the economy to start picking up.