Caterpillar: Caution Advised As Risks To Global Growth Remain

| About: Caterpillar Inc. (CAT)

Caterpillar Inc. (NYSE:CAT) is a heavy construction equipment company. It provides construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. Caterpillar's shares slumped in the third quarter of 2011 due to the European debt crisis, but recovered later in the year to report a small loss of 2% for 2011. Caterpillar recently traded at roughly $102.

Caterpillar reaffirmed its FY 2011 guidance on December 14. The company announced sales expectations of $56 billion and expects to earn $6.75 per share, which was in line with analyst estimates. The company will announce its full-year and fourth-quarter financial results on January 26th. On January 13th, Barclay Capital raised its price target on Caterpillar from $115 to $128, and gave an "overweight" rating on the company's shares.

Caterpillar has a market cap of $66 billion and a beta of 2.11. It is currently priced at 11.34 times its forward earnings. Caterpillar's EPS is expected to grow at 22% annually over the next five years. Caterpillar also has a dividend yield of 1.80%. S&P recommends the stock as a "Buy," giving it a one-year target estimate of $129, or a 26% return. Caterpillar is also a top pick for Thomson Reuters, which gives it a positive score of 10 on a 1-10 scale, and Market Edge, which recommended a "long" on the company.

Peers Comparison

Deere & Co (NYSE:DE) is one of Caterpillar's primary competitors. Deere provides agriculture and forestry equipment worldwide. It has a market cap of $34 billion. Deere has a beta of 1.59 and has a dividend yield of 1.90%. Its EPS is expected to grow at 14% for the next five years and the stock is currently trading with a forward PE of 10.9. Deere lost 5% in 2011. S&P gives a "Buy" on the stock and gives it a one-year target price of $99, corresponding to a 17% return. Thomson Reuters gives a positive score of 9 on a 1-10 scale, and Market Edge offers a "long" opinion.

Joy Global Inc. (NYSE:JOY) is a mining equipment manufacturer which focuses on the extraction of coal and other minerals and ores. The company has a market cap of nearly $9 billion. JOY has an 11.2 forward PE and a 17% expected EPS growth rate. It has a beta of 2.09 and has a dividend yield of 0.8%. JOY lost 13% last year. S&P recommends a "Buy" on JOY and projected a 12-Mo. price target of $100, or 21% return. Thomson Reuters gives the company a neutral score of 5 on a 1-10 scale, while Market Edge entered an "avoid" opinion.

Hedge Fund Position

Thirty-three hedge funds were invested in CAT in at the end of the third quarter, with a total investment of $1.09 billion. Ken Fisher's Fisher Asset Management had the most shares among the funds we track. The fund had more than 4 million shares worth about $320 million in CAT as of the end of September. Jim Simons' Renaissance Technologies, Steven Cohen's SAC Capital Advisors and Cliff Asness' AQR Capital Management also had positions in CAT at the end of September.

Deere was in 26 hedge fund portfolios at end of the third quarter; total hedge fund investment in the stock was $793 million. Over the same period, twenty hedge funds had JOY in their portfolios, with a total exposure of $156 million.


Caterpillar is a risky cyclical stock. It has a slightly less dividend yield than Deere, but it has the highest upside potential based on its expected EPS growth rate. S&P, Thomson Reuters and Market Edge all give positive recommendations on CAT while more hedge funds held positions in the company than competitors Deere and Joy Global.

In 2012, Caterpillar plans to move production of its mini-hydraulic excavator and track-type tractors from Japan to North America. It also plans to open a new excavator and tractor manufacturing plant in the United States; it will release the location in early 2012. These new projects may give Caterpillar's share price a boost. We hold a positive long-term outlook for the stock. However, we are short-term cautious because the risks to global growth are still higher than we'd like.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.