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Caterpillar Reports Moderating Declines in Mining, Rebounding Results in Construction, and Solid Free Cash Flow

Following Cat's fourth-quarter results, in line with our forecast, our fair value estimate remains $94.

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With a strong dealer network and economies of scale as the largest global construction and mining equipment manufacturer,  Caterpillar (CAT) has carved a wide economic moat, in our opinion. Following the company’s fourth-quarter results, we plan to maintain our $94 per share fair value estimate. The firm continued to see sharply declining mining markets, but increasing Construction and Power Systems revenue. While these gains weren’t enough to prevent total revenue from falling (down 11% in the quarter), the firm drove solid operating margins in both Construction and Power Systems, helping increase consolidated machinery profitability from a year ago.

In addition, the firm believes the dealer inventory reductions that have plagued its top line in recent quarters are now largely past. Management held its sales outlook for next year, a range of negative 5% to 5%, and estimated about $5.85 in 2014 earnings per share before expected restructuring expense. We will revisit our near-term EPS projection (currently $5.97), but broadly we believe Caterpillar’s performance is tracking our forecast of moderating declines in mining, rebounding results in construction and engines, and solid free cash flow due to lower capital spending needs and better internal inventory management.

Adam Fleck does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.