How Caterpillar Delivers Earth-Moving Gains Despite the Downgrades

NEW YORK (TheStreet) –- Shares of industrial earth-moving giant Caterpillar (CAT)  lost almost 4% last week following a recent downgrade to neutral from buy from Bank of America analyst Ross Gilardi, who also lowered his price target on the stock to $121 from $125.

It is the latest sign that many on Wall Street are becoming less enthused about the mining and construction industry in general and Caterpillar in particular. But this could provide investors with a buying opportunity. Here's why.

The stock, at close to $104, is up 14.5% on the year to date. This is an improvement from Caterpillar's 3% gain in all of 2013, compared to the 30% gain in the S&P 500, according to Bloomberg. The company has a strong yield of 2.6%.

Even with Gilardi's downgrade, his $121 price target still suggest gains of more than 15%. Caterpillar, which has always been a strong play on the global economic recovery, is worth that bet.

While the 3% year-over-year revenue decline in the most recent quarter was discouraging, full-year earnings are projected to grow close to 8.5% year over year. Next year's earnings are projected to grow by close to 15%. The trend is clear: Caterpillar has not forgotten how to make money.

So even though the company lowered its full-year revenue guidance to a range of $54 billion to $56 billion (down from $56 billion), rivals like Mohawk Industries (MHK) and Joy Global (JOY) haven't fared any better. For that matter, neither has Deere (DE) , whose revenue declined 5%.

With only the modest improvements seen in the housing recovery, Caterpillar continues to make the best out of a bad situation. With the company announcing plans to return $10 billion to shareholders in the form of buybacks, it pays to be patient. Roughly $2.5 billion worth of buybacks will take place in this current quarter.

This means even if the stock faced pressure from another downgrade, these shares will find support from the company's repurchase plan. What's more, the company's 70 cents per share dividend makes Caterpillar one of the best defensive plays on the market.

The company's commitment to return value to shareholders is one thing, but there are other potential catalysts. To the extent management is able to make the necessary adjustments to combat the slumping mining market and fix its machinery revenue, Caterpillar shareholders should expect some solid gains.

It's not going to happen overnight. The good news is Caterpillar has shown a willingness to cut costs, which will boost near-term margins and help the company withstand any potential downturn in cyclical construction.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @Richard_WSPB

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


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

"We rate CATERPILLAR INC (CAT) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, growth in earnings per share and increase in net income. 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

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