Is Caterpillar’s Stock a Safe Bet in Today’s Economy?

With shares of Caterpillar Inc. (NYSE:CAT) trading at around $89.50, is CAT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

When you play Caterpillar, you’re essentially playing the global economy. If you think there are good times ahead, then Caterpillar is a great play. If you feel tough times are ahead, then it’s a stock to avoid. The slowdown in Caterpillar’s stock over the past year shouldn’t come as a surprise to anyone.

In 2009, this stock performed extremely well when Ben Bernanke began propping up the market and overall economy with creative stimulus programs. Today, those stimulus programs have less impact than in the past. The market has also seen a tremendous run over the past few years, which limits upside potential. Since Caterpillar is a forward-looking play on the direction of the overall economy and market, it’s important to ask yourself one question before investing: where would the DJIA be without Ben Bernanke? Stop and think about that for a moment. Where was the DJIA before Bernanke intervened? Is the recovery natural or artificial? Think about the incredible move we witnessed after QE1. Then we had a substantial (yet not as effective) move after QE2. Since then, the power of Bernanke’s stimulus moves have weakened. A lot of people will bring up China. Contrary to popular belief, only 3 percent of Caterpillar’s business comes from China. However, that does leave a lot of room for growth. The problem is that there is no way of knowing if the numbers coming out of China are real. In the United States, we have the approaching fiscal cliff. A deal will likely be reached, but at what cost?

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It might sound as though a bearish case is being presented. That’s not 100 percent true. Caterpillar is a well-run company with a great future. This has also been the most profitable year in its existence, and it has been around since 1926. The Trailing P/E is 9.18, the Forward P/E is 10.30, the profit margin is close to 10 percent, and North American sales were up 9 percent last quarter on a YoY basis. In addition to that, housing performed well in October YoY. Housing starts were up 41.90 percent, and new home sales increased 17.20 percent.

This is a case of a great company versus a makeshift global economy. For a more objective analysis, let’s take a look at some numbers.