Is It Safe? Caterpillar Gets Ground Down

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The economic recession has devastated Caterpillar(CAT Quote), cutting in half its stock price during the past year.

But the largest U.S. maker of earth-moving equipment has rallied during 2009, jumping 26% over three months. Don't be fooled: The construction slump is in full effect. Only stimulus projects are propping up demand.

Here's what we know: Caterpillar posted a first-quarter net loss of 19 cents a share. Excluding redundancy costs, the company booked a profit. Revenue fell 22% from a year earlier. Still, net operating cash flow rose 27% to $895 million as Caterpillar made impressive efforts to bolster liquidity. Cash and equivalents quadrupled to $3.56 billion. Debt remained dangerously high at $34.9 billion. The company's debt-to-equity ratio, a measure of leverage, is excessive at 5.6.

To be sure, based on a comparison with peers and its own historical stock price, now's an attractive time to buy Caterpillar. The shares are cheap based on cash flow, earnings and sales. Caterpillar's price-to-earnings ratio is 8.3, and the company's stock offers a dividend yield of 4.4%.

The Commerce Department yesterday said March construction spending inched up 0.3%, beating the consensus estimate of a 1.6% drop. Non-residential construction, which includes public projects, increased 2%. But residential construction registered a sequential monthly decline of 4.6%.

As stimulus projects ramp up in late 2009 and 2010, Peoria, Ill.-based Caterpillar should see improved orders for equipment. But aside from government projects, business will remain weak. Residential and commercial construction is abysmal. Commercial builders, in particular, are in a state of rapid deterioration.