The shares, up only about 4% for the year to date, could keep coming down as Caterpillar faces additional challenges next year. Should you invest here? No. Here's why.
CAT revised its profit outlook upwards in the past few earnings reports. In the third quarter earnings per share for the year was revised up to $6. Despite this improvement, however, the company still projects its revenue to reach only $55 billion this year, 1% lower than its revenue in 2013.
For next year, the circumstances aren't favorable: China, one of Caterpillar's prime countries where it operates, is expected to grow even slower than in 2014. Moreover, in the first nine months of 2014, China's construction machinery industry dropped by 10%, year over year. Even the company's management stated that it projects "challenges in the near future."
The company's fastest-growing region remains North America. But the recent plunge in oil and gas prices is likely to eventually reduce the demand for Caterpillar's machinery used in well servicing, gas compression, and drilling applications. So we could see a fall in Caterpillar's revenue in North America related to drilling equipment.
The mining industry, including iron ore and coal, is also struggling. Prices are expected to decline further next year; according to the International Monetary Fund, iron ore prices are projected to drop by nearly 20% and coal prices by 1% to 4%. This turn of events is likely to also reduce the demand for Caterpillar's equipment in this industry.
Caterpillar's construction industry in North America has done well this year. In the past quarter alone this industry grew by 9%, year over year. But the Federal Reserve'sexpected decision to raise interest rates could slow down the housing market in the U.S., with higher mortgage rates potentially slowing demand for new homes. For now, the housing market continues to slowly improve, which is likely to keep driving up Caterpillar's revenue in this segment in the coming quarters.
Caterpillar's valuation is marginally higher than its peers with a forward P/E of 13.6. Cummins (CMI) - Get Report has a forward P/E of 13.4 and Joy Global's (JOY) ratio is 13.1. So the recent fall in Caterpillar's price hasn't made the company a bargain compared to its peers.
But Caterpillar still offers its investors sizable yield from its shares repurchase program and dividend. The company bought back $4.2 billion worth of shares this year and plans to buy a total of $10 billion worth of shares. So far this year, however, this annual buyback yield comes to 7.4%. This is on top of an annual dividend yield of 3%, so the total yield comes to 10.4%. In comparison, Joy Global and Cummins offer annual dividend yields of only 1.6% and 2.1%, respectively.
The bottom line is, Caterpillar is likely to see more challenges next year both within its industry and in the U.S. and abroad that could weigh on its stock. The relatively high dividend and buyback yields aren't enough to make it worththe investment, especially considering its current price.
TheStreet Ratings team rates CATERPILLAR INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate CATERPILLAR INC (CAT) a BUY. This is driven by multiple strengths, 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 increase in net income, revenue growth, notable return on equity, reasonable valuation levels and growth in earnings per share. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."
You can view the full analysis from the report here: CAT Ratings Report
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage. At the time of publication, the author held no positions in any of the stocks mentioned.