CHINA DAILY/Reuters
Caterpillar Inc. is making all the right moves to satisfy disappointed shareholders, but investors may want to contain their excitement until the heavy equipment giant offers more proof its restructuring plan will remain on track.
The Illinois-based company has been slashing costs, growing sales in some sectors and just approved a new stock buyback program to help boost investor confidence after what it called a "very difficult year" in 2013.
"They did a good job today giving investors everything that they had hoped for," William Blair & Co. analyst Lawrence De Maria said in an interview Monday. "From here it's going to be up to an acceleration and improvement in the momentum."
In particular, investors will be looking for a continued pickup in activity in the divisions that sell construction equipment and engines, and a turnaround in its high-margin mining division. Mining has been Caterpillar's worst performer as companies cut back on spending on equipment during the ongoing commodities slump.
"We expected there would be a decline in mining sales in 2013, and it turned out to be worse than we anticipated," Caterpillar chairman and chief executive Doug Oberhelman told investors on Monday after releasing the company's latest financial results.
Caterpillar posted a stronger-than-expected fourth-quarter profit of $1-billion (U.S.) or $1.54 a share, up from $697-million or $1.04 a share for the same time in 2012, driven in part by cost reductions. The company cut about 7 per cent of its global work force last year to make up for lower profits and sales.
While it reported strong construction equipment and engine sales for the last three months of the year, its once-robust mining division dragged revenues down 10 per cent to $14.4-billion. Analysts were expecting a profit of $1.28 a share on sales of $13.6-billion, according to estimates from Thomson Reuters.
Citing confidence in its long-term outlook, Caterpillar approved a new $10-billion stock repurchase program over the next four years.
Investors cheered the news, sending the stock up by as much as 7 per cent in Monday trading. Still, some analysts and investors remain cautious.
"Although we view the [repurchase] news and upside construction margin as incremental positives, we don't interpret the overall 2014 operating outlook as significantly different from expectations," noted RBC Dominion Securities analyst Seth Weber, who has a "sector perform" rating on the stock.
He is one of 15 analysts with a "hold" or equivalent rating on Caterpillar, while nine see it as a "buy," according to Thomson Reuters I/B/E/S. The consensus target price over the next year is $92.82. That's only slightly above Monday's closing price of $91.29 on the New York Stock Exchange.
Over the past year, shares have ranged from a high of $99.70 last February to a low of $79.49 in April. The shares are down about 6 per cent over the past 12 months, compared to a 20-per-cent return for the overall S&P 500.
The stock isn't cheap either, compared to some of its industrial peers.
Caterpillar trades at 15 times earnings, compared to 10 times for Deere & Co. and nine times for AGCO Corp., according to data from S&P Capital IQ.
"I don't think there's tremendous value there," said Stan Wong, director of wealth management and portfolio manager at ScotiaMcLeod.
It's not a stock his funds own or plan to buy; Mr. Wong prefers instead to look at consumer names for potential growth in the near term, particularly as China is viewed to be changing its focus more toward consumer activities and away from infrastructure spending.
Investors still interested in the industrial space may want to own Caterpillar because it's the largest global manufacturer of heavy equipment, says Barclays analyst Andrew Kaplowitz, who has a "buy" on the stock and $104 price target. He also sees the new share repurchase program as a sign the company is confident about its future growth. "Putting money where their mouth is, helps," he said.
Investors may also want to hang on for the company's attractive yield of 2.7 per cent, slightly higher than Deere at 2.4 per cent and engine maker Cummins at around 2 per cent. The average dividend yield of current constituents of the S&P 500 is 2.31, according to S&P Capital IQ.