Caterpillar About To Come Out Of Its Cocoon?

| About: Caterpillar Inc. (CAT)

Caterpillar (NYSE:CAT) was down over 2% on Friday's trading session, in part because of slowing sales of its machinery. Caterpillar's success is no longer tied heavily to China's infrastructure spending. According to the company, China accounts for only 3% of Caterpillar's sales. Caterpillar has slowed production of its machinery to avoid holding excess inventory, to the point of temporarily shutting down some of its plants.

Earlier this year, CAT revised forward guidance down for the next three years. They cited a slowing global economy, growing fiscal uncertainty domestically, and other macroeconomic factors. However, Caterpillar just released some astounding numbers that show global sales grew the last three months ending November by 5% year over year. That could be a sign that the bottom is forming on this machining giant.

Currently, Caterpillar is closer to the 52-week low of $78.25 than the 52-week high of $116.95. Caterpillar has been the victim of a slowing global economy without question. Governments around the world have been installing austerity measures and spending cuts throughout their economies. With infrastructure spending being cut in 2013 as a result of the Fiscal Cliff, it would seem as if Caterpillar is staring another tough year in the face.

Before you start thinking that way, look at the fundamentals. CAT's P/E is 8.97, a Forward P/E of 10.06, a PEG of .70, and a P/S ratio of .87. Compare those numbers to rival Deere and Company (NYSE:DE). Deere has a P/E of 11.29, Forward P/E of 9.70, PEG of 1.03, and a P/S ratio of .93. By the fundamentals, Caterpillar is cheaper than Deere no matter which combination of fundamentals you prefer.

Now compare Caterpillar's fundamentals against the industry average. The industry average is a P/E ratio of 14.82, a PEG of .78, and a P/S ratio of 1.22. Each of Caterpillar's fundamentals are cheaper than the industry average. Combine that with the fact that Caterpillar has firm support just above $85/share after looking over the technical indicators, and Caterpillar is looking poised for a rebound.

Why does this make a difference? A good stock in a bad sector still doesn't make money. That's true. However, when an entire sector looks cheap, and it isn't going under, it's time to look for the best in that sector for the rebound. If you did that with the homebuilders at the beginning of 2012, such as Pulte (NYSE:PHM) or Toll Brothers (NYSE:TOL), you would be staring at over 100% returns YTD. If you think that the machining sector is about to go bankrupt, then I'd be happy to sell you a bridge in London as well.

There are only two reasons I would avoid holding Caterpillar in 2013. If the Fiscal Cliff remains unresolved through the end of winter, we could see the forced spending cuts hurting Caterpillar's bottom line. Regular maintenance on roads could be cut. Businesses will abandon building projects for the year, and reallocate those resources to continue to build shareholder equity. Businesses will only tolerate uncertainty for so long before turning to other options to use resources on. The other reason will only happen if the Fiscal Cliff isn't resolved, and that is if the global economy as a whole slows drastically. Caterpillar relies on government spending from around the world, as well as business expansion. If the global economy were to slow at a drastic pace, funds for projects needing CAT machinery would dry up quickly.

While countries are seemingly racing to see who can cut spending faster, they still have roads, bridges and dams that need to be maintained. Caterpillar's dominance in the machining space isn't because of price, but product quality and service quality. Sovereigns across the world have relied on, and will continue to rely on, Caterpillar's machines to maintain those bridges and roads that must be maintained. Don't count on having many more opportunities to pick this Illinois based company up for cheap. With the DOW average of a 13 P/E, Caterpillar's forward P/E of 10.06 has investors with a long-time horizon salivating.

Disclosure: I am long PHM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investing involves a significant risk of loss. As such, never invest more than you can afford to lose. Always consult with a licensed financial professional before adding a position to your portfolio.

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