Stock Pick: Taking a wait-and-see approach on Caterpillar Inc. (CAT)

Could be hurt by a choppier market

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Chart showing trailing 12-month stock performance of Caterpillar Inc.

Every investor should have some stocks on a watch list that they can then buy when the timing is right. Caterpillar Inc. (NYSE: CAT) is one of those companies you’ll want to add to that list.

The company, which manufactures and sells trucks, machines, power systems and other items to the construction and mining industries, had a strong first quarter with earnings per share coming in at $1.61 versus the street’s $1.24. Profits also increased by 5%.

Despite those results, Joel Tiss, an analyst at BMO Capital Markets, suggests waiting to buy in. From his point of view, earnings growth for the year will be moderate and a choppier stock market could hurt the stock, which is sensitive to economic ups and downs.

He also thinks its price-to-earnings multiple, which is at about 14 times forward earnings, could fall. Caterpillar shares have traded at around 11, 12 and 13 times in the past and as we get closer to the sector’s cyclical peak—which may be in 2016, says Tiss—then the stock could get less expensive.

Its mining division is also hurting, writes Jerry Revich, an analyst with Goldmach Sachs, in an April 25 report. The company expects resource-related sales to decline by 20% in 2014, as commodity prices continue to struggle. That resource decline is one of the key risks facing the company, he says. If the downturn is longer, it could have a larger affect on the business.

Saying all that, the company has done a good job of cutting costs. Its selling, general and administrative expenses (SG&A) and research and development costs were down 9% year-over-year. That reduction has been a big reason why it continues to do well in the still slowly recovering global economy, says Tiss.

It will also benefit from a continued European and U.S. construction recovery, says Revich. “Underlying end demand remains strong in the U.S. while improved cement volumes and equipment operating hours point to an emerging recovery off the bottom in Western Europe,” he writes.

While Revich has a neutral rating and Tiss has a market perform rating on the stock, both did raise their 12-month price targets on April 25. The stock is trading at $105 a share, but Tiss thinks it could hit $120, which Revich says it will reach $112.

So while there could be a better entry point in the future for long-term investors, if these analysts price targets end up being right, then there is a chance you can get a boost in the short-term too. Keep an eye on this one.

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