Caterpillar Bolsters Its Case as One of 2012’s Top Stocks

Caterpillar (NYSE:CAT) delivered what the market likes best Thursday: a blowout beat-and-raise quarterly performance. Yes, it’s still early in the year, but the company’s fourth-quarter results and outlook help boost my case for Big Cat as InvestorPlace‘s top stock for 2012.

Caterpillar, the world’s largest maker of construction and mining equipment, said increased global demand boosted profit 60% in the most recent quarter on record sales.

Fourth-quarter profit reached $1.55 billion, or $2.32 a share, up from $968 million, or $1.47, in the year-ago period. Earnings topped Wall Street’s forecast by a whopping 59 cents a share, according to data from Thomson Reuters.

Revenue for the three months ended Dec. 31 rose 35% to $17.24 billion, up from $12.81 billion a year ago. Analysts, on average, were looking for revenue of $16.05 billion.

“The 2011 increase in sales and revenues was the largest percentage increase in any year since 1947, and much of it was driven by demand for Caterpillar products and services outside of the United States,” CEO Doug Oberhelman said in a statement. “As a result, 2011 was a record-breaking year for U.S. exports at nearly $20 billion.”

For the full year, Caterpillar earned $7.40 per share, beating its previous record of $5.66 per share — set back in 2008 — by more than 30%. Furthermore, the company’s machinery and power systems business delivered operating cash flow of nearly $8 billion — good for Cat’s top year ever.

But best of all was Caterpillar’s outlook for 2012. The company forecast full-year earnings of $9.25 per share, well ahead of the Street’s projection for $9.06.

Caterpillar, a component of the Dow Jones Industrial Average, is up more than 20% for the year-to-date, beating the broader market by almost 15 percentage points. The key to CAT is that it is finely attuned to the global economy, and anxiety over recession in Europe and a possible slowdown in China had beaten a good stock down at the end of 2011.

The company’s latest results make the case that global recession fears were overdone. Emerging-market demand — especially from China — for coal, copper and iron ore have made CAT’s recent focus on mining acquisitions look quite canny, indeed.

Caterpillar bought mining company Bucyrus International last summer for $8.8 billion, adding shovels and drills to its portfolio of heavy equipment sales. The company also struck a deal in November to acquire Hong Kong-based ERA Mining Machinery for about $900 million.

Meanwhile, capital spending at major mining companies is expected to climb 25% this year, according to data compiled by Bloomberg Industries.

All of that bodes well for Caterpillar’s fundamentals going forward, and shares still look like a bargain, to boot. CAT’s forward price-to-earnings ratio of 12 offers about a 25% discount to its own five-year average, according to Thomson Reuters data. That’s despite its strong start to the year.

Caterpillar’s trailing P/E also looks good on a relative valuation basis: At less than 17, shares trade at a 12% discount to their own five-year average. Meanwhile, by the price/earnings-to-growth ratio — which measures how fast a stock is rising relative to its growth prospects — CAT offers more than a 50% discount to its own five-year average.

In short, the stock trades at very compelling valuations, even at current levels.

As long as emerging-market demand keeps fueling Caterpillar’s mining business, the stock should continue to bulldoze through the rest of 2012.

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

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