Caterpillar Stock Only a Hold Even as Outlook Brightens for 2015

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The outlook for Caterpillar (CAT) stock hasn’t been this good in four years, as a beat-and-raise quarter and slightly healthier global economy might finally get CAT stock out of the rut it has been in since commodities prices petered out.

CAT Caterpillar stock Inc. (NYSE:CAT)Caterpillar stock was a star of the early bull market, putting up astonishing gains of an economic rebound fueled by Chinese stimulus.

As the world’s largest maker of construction and mining equipment, CAT looked like a long-term winner, thanks to huge investments in infrastructure in the developing world and demand for coal and other commodities.

Then, in 2010, Caterpillar decided to become the biggest player in the mining industry — spending billions on acquisitions — just as China’s economy cooled dramatically. With prices for coal, iron ore and the rest in a tailspin, demand for mining equipment took a hit, making CAT’s big expansion plan a liability.

In the years since, CAT has been slashing costs and waiting for the day when economic growth picks up sufficiently both domestically and overseas. Although we’re hardly there yet, Caterpillar sees 2015 as a year when the macroeconomic picture finally brightens.

Better Times Ahead for Caterpillar Stock

To be sure, CAT isn’t predicting a miracle in 2015. It estimates that sales will remain relatively flat with the current year. But it does see reasons for cautious optimism in both developed and developing markets:

“We believe there is a reasonable likelihood that world economic growth could improve in 2015. In developed countries, growth-oriented monetary policies should support continued modest economic improvement. In addition, we believe there is potential for increased investment in infrastructure in countries such as the United States, India and Turkey.”

In the meantime, the Caterpillar playbook remains the same: squeeze more earnings out of flat sales through layoffs and other restructuring efforts. It’s the sort of activity the market always rewards, but not enough to let Caterpillar stock break out.

In the other big market-pleasing move, CAT has been buying back stock and delivering dividends. For the year-to-date, the company said it has returned a total of $5.4 billion to shareholders in buybacks and dividends.

The actions have been good enough to keep Caterpillar stock up with the S&P 500. Its 4% gain for the year-to-date matches the broader market. Go back farther, however, and Caterpillar stock is a big-time laggard over the last one-, three- and five-year periods.

Whether CAT is a buy or not depends on your view for global growth. At some point it will come back, and years of restructuring will have spring-loaded the company’s bottom line. If you can increase profits when sales are flat, imagine what happens when revenue actually starts growing again.

Bottom Line

That said, the safest way to look at CAT stock is still a hold. It’s hard to have faith in the outlook for the global economy when Europe is flirting with another recession and multiple geopolitical crises threaten to boil over.

As we’ve seen through years of trading, downside in CAT is limited, so no danger there. But upside in Caterpillar stock has been limited too. If the economy does pick up and CAT lifts it sales view, shares will take off and there will plenty of time to ride along once the trend is confirmed.

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As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/caterpillar-stock-outlook/.

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