Are the Shorts Right About Caterpillar?

With shares of Caterpillar Inc. (NYSE:CAT) trading at around $88.10, is CAT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock's Movement

When it comes to Caterpillar, a lot depends on your belief in the potential, or lack of potential, in the global economy. That being the case, any investment considerations should be based on that fact alone. However, if you would like to read on, please feel free to do so.

Below is a list of negatives for Caterpillar:

Stock underperformed the market over the past year Weak demand for mining equipment Declining backlog 45 percent year-over-year decline in earnings (Q1) 17 percent year-over-year decline in revenue (Q1) Global sales down 11 percent for three months ended March 2013 Reduced sales outlook Slowing revenue and earnings growth on an annual basis Poor debt management

The list of positives for Caterpillar is a bit shorter:

Strong cash flow Solid margins 2.40 percent yield Despite a slowing rate of growth, consistent improvements in revenue and earnings on annual basis Strong leadership

In regards to strong leadership, according to Glassdoor.com, 90 percent of employees approve of CEO Douglas R. Oberhelman. Strong leadership is often undervalued by investors. It's the single most important factor for any company. Overall, employees have rated their employer a 3.6 of 5, and 78 percent of employees would recommend the company to a friend.

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The chart below compares fundamentals for Caterpillar and Deere & Company (NYSE:DE)

	CAT	DE
Trailing P/E	11.88	10.78
Forward P/E	10.94	9.95
Profit Margin	7.88%	8.51%
ROE	29.55%	41.03%
Operating Cash Flow	6.35B	1.54B
Dividend Yield	2.40%	2.30%
Short Position	5.10%	3.00%

Let's take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Mixed

Caterpillar hasn’t performed well over the past year, but the past month has been impressive.

	1 Month	Year-To-Date	1 Year	3 Year
CAT	9.54%	-1.05%	-1.84%	56.29%
DE	5.32%	2.31%	19.43%	59.23%

At $88.10, Caterpillar is trading above its 50-day SMA and below its 200-day SMA.

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50-Day SMA	85.45
200-Day SMA	89.06

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Caterpillar is weaker than the industry average 0f 1.40.

	Debt-To-Equity	Cash	Long-Term Debt
CAT	2.21	3.61B	40.50B
DE	4.11	4.15B	33.96B

E = Earnings Are Steady

The rate of earnings and revenue growth has slowed, but both have consistently improved on an annual basis.

Fiscal Year	2008	2009	2010	2011	2012
Revenue ($) in millions	51,324	32,396	42,588	60,138	65,875
Diluted EPS ($)	5.66	1.43	4.15	7.40	8.48

When we look at the last quarter on a year-over-year basis, we see significant declines in revenue and earnings.

Quarter	Mar. 31, 2012	Jun. 30, 2012	Sep. 30, 2012	Dec. 31, 2012	Mar. 31, 2013
Revenue ($) in millions	15,981	17,374	16,445	16,075	13,210
Diluted EPS ($)	2.37	2.54	2.54	1.04	1.31

Now let's take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

There is much talk about Europe recovering. Nobody knows if Europe is actually recovering. First of all, it wouldn't happen overnight. Secondly, it likely has a lot more to do with a friendly ECB. As far as China goes, it's not the same growth story as it was in the past. And there is always talk of manipulated numbers coming out of China.

Global infrastructure and construction spending are down. Is it possible that stock and real estate prices will continue to appreciate for many years to come, and that this newfound wealth and confidence will spill over into the jobs market, which will then lead to increased construction? Anything is possible in this crazy world, but that would be a longshot. An incredible longshot – like trying to sneak into an NFL football game as Aaron Rogers without anyone noticing and throwing 4 TDs with no INTs.

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Conclusion

Slowing demand is a major problem for Caterpillar. The only reason Caterpillar earns a neutral WAIT AND SEE is because of the upward momentum of the broader market and strong leadership.