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TheStreet Open House

Why Caterpillar (CAT) Will Soar on Monday

NEW YORK (TheStreet) -- Caterpillar  (CAT) booked some solid early morning gains on Monday after posting better-than-expected earnings before the bell. By market open, shares added 6.8% to $91.99.

The heavy machinery supplier recorded fourth-quarter net income of $1.54 a share, 48% higher than in the same quarter of 2012 and significantly more than the $1.28 a share expected by Thomson Reuters-surveyed analysts. Quarterly revenue of $14.4 billion came in 10.4% lower than the year-ago period but managed to exceed consensus by $762 million.

Full-year sales and income saw a sharp decline from 2012, primarily driven by a drop in sales of new machines to the mining sector. Revenue of $55.66 billion was 16% lower and net income of $5.75 a share dropped 32% from $8.48 a share a year earlier. Analysts had expected more muted net income of $5.49 a share and revenue of $54.86 billion.

For 2014, management expects sales activity similar to 2013 -- around $56 billion within an estimate range of 5% on either side. Excluding restructuring costs, the company expects net profit of $5.85 a share.

By topping estimates, Caterpillar, the world's largest mining and construction equipment maker, took a step towards restoring confidence an industrial recovery was in motion, albeit with continued challenging conditions expected through 2014.

"We see some signs of improvement in the world economy," said CEO Doug Oberhelman in a statement.

However, one of its most profitable market segments, mining, will continue to spend conservatively over the year ahead.

"Despite our expectation that mine production will continue to increase, we expect mining companies to further reduce their capital expenditures in 2014. As a result, we're expecting sales in Resource Industries to decline modestly," continued Oberhelman.

To increase profitability, the Peoria, Ill.-based business has turned to restructuring to cut overheads. Over 2013, the company announced the closure of several small facilities and the downsizing of others, as well as the reduction off nearly 2,000 management and support positions. In total, Caterpillar reduced its global full-time workforce 5.5% to 118,501 positions by year's end. This year, the company expects to continue its restructuring actions which are expected to cost a total $400 to $500 million with an after-tax impact of 50 cents to 60 cents a share.

In its first quarter ending March, Caterpillar plans to repurchase $1.7 billion in shares, completing a $7.5 billion buyback program. The Board has also approved a new $10 billion stock repurchase program, set to expire on Dec. 31, 2018.

"The completion of our previous program and the decision to announce a new $10 billion program are a result of our record cash flow, the strength of our balance sheet and our confidence in the long-term future of Caterpillar," Oberhelman said.

TheStreet Ratings team rates CATERPILLAR INC as a Buy with a ratings score of B. The team has this to say about their recommendation:

"We rate CATERPILLAR INC (CAT) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its good cash flow from operations and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

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