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CAT Stock Is a Buy – Caterpillar Earnings Show Recovery Underway

Caterpillar (CAT) exploded out of the gate after a nice earnings beat and strong forward guidance. As a result, CAT stock is up about 6% in early trading.

caterpillar-stock-cat-stockOf course, this earnings boost is cold comfort to a lot of Caterpillar stock owners. Shares still are in the red across the last 12 months vs. a 20% rally for the S&P 500, and CAT stock is flat since early 2011 while the broader market has soared over 40%.

So what’s up with CAT stock after earnings? Is this industrial giant finally on the rebound, or is this just another headfake from a troubled machinery manufacturer?

Personally, I think it’s a hint of a recovery. And here’s why:

Caterpillar Earnings Details

The details of Caterpillar earnings are strong across the board. Highlights include:

  • CAT earnings per share of $1.54 vs. a target of just $1.29 for a 19% earnings surprise.
  • Raised EPS guidance for Caterpillar stock across fiscal year 2014.
  • A new $10 billion stock buyback plan.

Yes, revenues did fall 10% year-over-year to $14.4 billion. And yes, profits were down across FY 2013, too.

But forecasts matter, and Caterpillar is looking “less bad” than many had expected.

Furthermore, heavy equipment sales for companies like Caterpillar continue to show signs of resilience — and hopes of continued recovery in infrastructure and housing across 2014 will mean brighter days ahead for CAT stock.

Risks Remain in CAT Stock

Of course, continued top-line trouble is still a risk factor. There’s no denying that 2013 was just a brutal year for the company in regards to revenue, as evidenced by a double-digit decline in sales for Caterpillar and five consecutive quarters of top-line declines.

While stock buybacks and inefficiencies have juiced earnings and improving sentiment could lift the stock for a while, lasting gains will have to rely on Caterpillar sales growing — or at least stabilizing — in 2014.

Furthermore, the mining segment of CAT remains under big pressure. In addition to broad troubles based on a weak commodities market broadly, there’s also continued hangover from the ill-advised buyouts in the sector, including Chinese mining equipment company Siwei that apparently had cooked the books in advance of a CAT merger as well as a $7.6 billion buyout of Bucyrus International that resulted in a lot of overcapacity just as commodity markets crashed.

Still, if you’re a believer in the long-term prospects of a recovery at home and abroad, Caterpillar is a great way to share in that growth. Improving earnings show a company that is streamlined and efficient, and brighter skies in 2014 and 2015 could continue to lift this cyclical industrial play.

So why Caterpillar instead of other cyclical industrials like Deere (DE) or Cummins (CMI)?

Well, aside from the specifics of Caterpillar’s business, there’s also a bigger dividend than its peers.

And with a 2.6% dividend yield that’s roughly 20% of 2014′s forecast earnings, CAT stock has a lot of income potential to boot. The company just boosted its payout 15% in 2013 from 52 cents to 60 cents a quarter and could see continued dividend growth going forward — particularly if earnings are moving higher, too.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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