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Stock Analyst Update

Caterpillar Deserves Investors' Patience

Slow engine sales mute growth, but long-term prospects are good.

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What Happened?
Construction equipment maker and Dow component Caterpillar (CAT) reported third-quarter earnings of $0.62 a share Tuesday, $0.04 better than reduced Wall Street estimates. Caterpillar warned several weeks ago that earnings this quarter would be lower than expected because of the weak euro and slow North American equipment sales, but the problems turned out not to be as bad as some feared. Revenue growth was hampered by a decline in sales of truck engines, though Cat's distributed power business continues to grow quickly.

What It Means for Investors
Despite the stock's rocky performance this year in an environment of rising interest rates, we think that Caterpillar is in good shape for the long run. The company has generally done a good job of cutting costs and making itself leaner and better able to deal with the fluctuations inherent in such a cyclical industry. Tuesday's conference call highlighted Caterpillar's partnership with i2 Technologies (ITWO) to create an online marketplace and use the Internet to improve supply-chain efficiencies. Moreover, Cat's emergence as a leader in distributed power generation has helped it diversify its product line and boost growth.

Cat's performance will continue to be influenced by macroeconomic factors such as currency fluctuations, and there are no immediate catalysts to get the stock out of the slump it's been mired in for most of this year. Still, we think Caterpillar is doing a lot of things right for the long term, and that it will eventually reward patient investors willing to stick out the current turbulence.

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