Caterpillar Is as Healthy as a Horse

You may have noticed that major equipment manufacturers Caterpillar (NYS: CAT) and Deere & Co. (NYS: DE) have slid somewhat from their February highs.

The declines haven't been significant -- just single digits -- but since the companies exist in the rarified air of those we typically refer to as "bellwethers," let's subject at least Caterpillar to a basic examination. We can then attempt to determine whether any sort of serious illness (other than the market's paranoia about a harder-than-expected landing for China) might be afoot.

One terrific quarter
Certainly the company's most recently reported quarterly performance didn't indicate even mild sniffles. Net income of $1.55 billion trounced its year-on-year comparable figure by a solid 60%. And $2.32 on the per-share line, compared with a consensus expectation of $1.76, made one want to suggest that the couple-of-dozen analysts who follow the company might better have spent their time constructing small airplanes than building Caterpillar financial models.

Beyond that, the company was satisfactorily digesting its newly purchased mining equipment manufacturer Bucyrus International, along with locomotive maker Electro-Motive Diesel. Indeed, its biggest problem appeared to be capacity constraints, which were making timely deliveries to customers difficult in some areas and have since led to several announcements of expansion plans.

Too much reliance on China?
This isn't meant to minimize China as an issue for a host of companies. A recent cut in the country's 2012 growth target to 7.5% certainly didn't warm the cockles of international executives' hearts. Nor did a comment by an executive of mining giantBHP Billiton (NYS: BHP) about a flattening of iron ore demand in the big country. After all, China typically buys nearly all the high-profile steelmaking commodity it can get from Billiton and its major mining buddies, Anglo-AustralianRio Tinto (NYS: RIO) and Brazil's Vale (NYS: VALE) .

But the 7.5% figure is an estimate that could be topped, just as analysts' forecasts occasionally are, and as last year's expectations for China were. Further, anticipating uninterrupted linear growth is neither realistic nor healthy in most of the world's endeavors. We certainly know that to be the case in the U.S., where our economy is beginning to display some springtime buds, and growth of 7.5% won't make it into our own wildest dreams.

Finally, Mr. Putin
And then there's Russia, which lately has been the subject of minimal discussion in world trade circles, even though in December Vladimir Putin and his pals were finally dubbed acceptable for World Trade Organization membership. The Russians had participated in WTO's rush week in each of the past 18 years, starting when Boris Yeltsin was their president.

They'll now complete their pledgeship this summer in time to join the other 153 countries already in the group. The new membership obviously won't have a bottle-rocket effect on the Russian economy. But it's difficult to imagine that the Russians and their trading partners throughout the industrialized world won't benefit from the tariff reductions that will occur as part of the new relationships.

The WTO notwithstanding, trade between the U.S. and Russia is impeded by the so-called Jackson-Vanick amendment, a Cold War vestige that was instituted as a form of retribution for Russia's shoddy human rights practices. The Obama administration is seeking Jackson-Vanick's repeal, the Senate is discussing its stance on the matter, and yours truly believes the restriction will be flushed prior to the election. Russia's economic development minister contends that the industries that will fare best from WTO membership include petrochemicals, metals, and steel.

A big gift for Caterpillar
Caterpillar clearly will be at or near the top of the list of the U.S. companies that stand to gain from these changes. It already operates and is expanding a plant in Tosno, Russia, where it manufactures off-highway trucks. It's not difficult to envision such trucks being in higher demand than, say, Chevy Volts, if national development picks up speed for the world's biggest energy exporter.

Its Russian plant is but one of many that Caterpillar is building or expanding. In the aforementioned China, for instance, it's enlarging its research and development center in Wuxi, Jiangsu Province. The three-year-old center already supports 500 engineers and related staff. Also in Jiangsu Province, the company is adding to a manufacturing facility in Xuzhou. The latter project's scope is indicated by its scheduled completion date in 2016.

In addition to Russia and China, a Cook's Tour of Caterpillar's projects would take us to Sumter, S.C., where a cylinder manufacturing plant is being beefed up; a mining truck plant in Illinois; a small engine facility in India; and a parts distribution center in California. A month ago the company announced that it had selected the Athens, Ga., area -- the home of the University of Georgia Bulldogs -- as the site for a $200 million, one-million-square-foot, state-of-the-art facility that will directly employ 1,400 people in manufacturing small track-type tractors and mini hydraulic excavators. All in all, the new facility will ultimately create 4,200 jobs in the U.S.

Foolish bottom line
Add to this frenetic expansion pace analysts' expectations that the company will increase its year-on-year per-share earnings by 15% and more than 50% in the March and June quarters, respectively. And beyond that its trailing 12-month return on equity has topped an impressive 40% (generated without a push from excessive debt), and it sports a compelling 0.47 PEG ratio. Next, attempt to find a real head-to-head global competitor for Caterpillar.

Once you've considered those items, I think you'll agree that, not only is the company healthy as a horse, but Caterpillar clearly belongs on every Fools' individual version of My Watchlist.

At the time thisarticle was published Fool contributorDavid Lee Smithdoesn't own shares in any of the companies named in this article. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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