What One Thing Will Be Most Important For Caterpillar's Stock In 2015?

| About: Caterpillar Inc. (CAT)


Last quarter, Caterpillar's Energy and Transportation segment accounted for more than 40% of total sales and nearly all of its operating profit.

This segment has been its growth driver whereas all other segments have seen declines.

With the price of oil crippling CAT's outlook in this important segment, it becomes quite obvious what investors should monitor as a sign to buy CAT.

With Caterpillar's (NYSE:CAT) stock falling 7% on revenue guidance that was $5 billion shy of the $55 billion analysts expected for 2015, and its 2015 EPS outlook being about $2 off expectations, the only thing that's certain is that management is setting the bar quite low for the year ahead. The reason for that low bar is the price of oil, as its sharp decline in recent months has management making 2015 predictions based on the assumption that low oil prices will be ongoing. As a result, Caterpillar becomes a play on the price of oil, a very good one if you think oil prices are going higher.

More than 40% of Caterpillar's fourth quarter revenue came from its energy & transportation business, and according to management, approximately one-third of its sales in this business are related to oil and gas. That means about 15% of Caterpillar's $14.24 billion in fourth quarter revenue was tied directly to oil and gas.

Furthermore, energy and transportation is the most important segment to Caterpillar's stock. Not only did it have 11% revenue growth in a company whose revenue declined 1.1% year-over-year during the fourth quarter, but its operating profit of $1.07 billion was equal to Caterpillar's entire Q4 operating profit. Therefore, when Caterpillar CEO Doug Oberhelman stated that "the oil price decline is the most significant reason Caterpillar expects a 20% cut in its earnings this year" it should be no surprise the stock tanked.

As a result, Caterpillar is most certainly an investment play on the direction of oil prices. For 2015, Caterpillar currently expects a 10-15% decline in energy & transportation, which significantly differs from the double digit growth investors have grown accustomed to.

That said, investors continue to place their bets on the long and short side of oil. With Brent Crude now $49 and the WTI just over $45, both are near 52-week lows, but after being cut in half since late last-year, both have been relatively stable thus far in 2015. Therefore, stocks like BP (NYSE:BP) and EOG Resources (NYSE:EOG), which are large investments on oil, have both traded higher in the first month of 2015. This is at least a good sign that investors are betting on a recovery in oil, perhaps not a full recovery in 2015, but at least some improvements.

If so, Caterpillar might make a great investment. It has a dividend yield of 3.5%, trades at less than 14 times this year's expected earnings and buys back stock aggressively (over $4 billion last year in buybacks). Not to mention, Caterpillar has other businesses like construction equipment and rail that could benefit from the economic growth caused by low oil prices. Caterpillar predicts that low oil prices could act as a fiscal stimulus for net importing countries, but admits that this positive won't happen overnight. The point is that even if oil prices improve moderately in 2015, the economic gains created from low oil prices combined with the improvements in Caterpillar's energy and transportation business - created from even a moderate increase in oil prices - could set the company up to exceed low expectations, and lead to stock gains.

All things considered, whether or not to invest in Caterpillar at 52-week lows ultimately comes down to an investor's outlook on oil prices. In other words, if you expect oil prices to increase from this point forward, then buy Caterpillar. If not, then don't. Because at this point, the Caterpillar investment story really is all about oil.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

About this article:

Tagged: , , , Farm & Construction Machinery
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here