Caterpillar The world of investing is full of choices. Selecting those areas which can provide above average returns requires focusing on corporations with: strong management, balance sheets and business models. These elements allow firms to increase its earnings, dividends and shareholder value. This is what some of the most successful corporations do to achieve these objectives.

Since 1926, Caterpillar has been focused on providing tractors, construction equipment and other machinery to a variety of industries. The most notable include: oil / gas, construction and locomotives. Over the years, its business model has been continuing to evolve to meet the changing needs of customers. The result is that the firm is selling a variety of products in numerous countries around the world to include: the U.S., Canada, Brazil, China, the EU and Russia. (Standards and Poor's, 2014)

Caterpillar is organized into a number of different segments (i.e. Construction, Resources, Power Systems and Financial Products). Each one of them will cover the customer's specific needs and ensure that they have the financing to purchase different machinery and equipment. Construction is focusing on meeting the needs of the construction industry. The merchandise they sell include: backhoes, small wheels, skid steers, multi-terrain, medium wheel, compact track, compact wheel, track-type loaders; mini excavators, wheel excavators, small / medium / large track excavators, motor graders and pipe layers (for heavy construction). (Standards and Poor's, 2014)

Resource Industries sells materials that are utilized in the exploration and extraction of various natural resources (i.e. gold, oil and silver). The different products they sell include: electric rope, hydraulic shovels, draglines, drills, high wall / long wall miners, hard rock vehicles, large track-type tractors, trucks, large wheel loaders, wheel tractor scrapers; wheel dozers, machinery components, electronics and control systems. Power Systems is manufacturing / distributing generators, engines and integrated systems. The equipment they sell include: reciprocating engines, turbines, turbine-related services, diesel-electric locomotives / components, rail-related products and services. (Standards and Poor's, 2014)

The Financial Products division provides retail and wholesale financing alternatives for customers. It focuses on addressing the different issues they will face on the job. The most notable include: loans, property / casualty / life / accident / health insurance and short-term receivables. These areas give customers greater amounts of flexibility and it helps Caterpillar to meet these needs. (Standards and Poor's, 2014)

The result is that Caterpillar has become one the largest construction firms in the world. However, the stock is trading nears its 52-week high and the developing economies slowing. This is creating concerns about its valuations moving forward. (Standards and Poor's, 2014)

To determine if the company is a good long-term buy requires focusing on its strengths and weaknesses. This will be accomplished by conducting a financial review, providing a pro forma balance sheet, ratio analysis, return on equity, asset management performance, its financial policies and a synapses of the findings. Together, these elements will determine if now is the right time to purchase Caterpillar.

A financial statement review

The different financial statements are demonstrating how the company is in strong fiscal shape. For instance, the annual report is indicating that Caterpillar has diversified their business model to provide customers with an array of services through their 16, 200 dealerships. They sell them various products / services and provide continuing support. This is something that helps the brand to receive a larger following in developed and developing countries.

The result is that the earnings per share and the dividend have been steadily increasing. The case of earnings the firm is realized $5.75 in 2013. This is up from $1.43 in 2009. However, the earnings are down from 2012 which was $8.48. While the dividends, have been steadily increasing from $1.68 (in 2009) to $2.23 (in 2013). This is indicating that the company's strategy is working to increase the bottom line numbers and shareholder value. Yet, it is also illustrating a certain amount of volatility directly related to shifts in the economy. This is because the company sells its products to firms that are involved in the manufacturing of specific products. If there is a decline, it will adversely impact the firm's earnings. The drop from 2012 to 2013 is indicative of this.

According to Graham (1976), those companies that are cyclical will have a direct impact on: the price of the stock,...

When the economy is shifting, there is the potential to realize higher returns at the end of recession. This is when the earnings and the balance sheet will improve. However, at certain times, the company will become volatile from shifts in the economy. (Graham, 1976) This occurred from 2008 to 2009 when the stock fell to $24.52 (down from the all time of $82.63). The key to buying the stock over the long-term is to purchase at the time when the economy and earnings are steadily improving. ("Caterpillar," 2014) This increases the chances of seeing higher total returns from the growth and dividends.
These trends are confirmed by the different figures from the balance sheet. In this case, the company has been seeing increasing and declines in certain areas with them saying, "We reported revenues of $2.78 billion for 2013, an increase of $90 million, or 3%, compared with 2012. Profit after tax was $530 million, a $98 million, or 23%, increase from 2012. The increase in revenues was primarily due to a $229 million favorable impact from higher average earning assets, partially offset by a $123 million unfavorable impact from lower average financing rates on new and existing finance receivables and operating leases and a $14 million unfavorable impact from returned or repossessed equipment. Profit before income taxes was $718 million for 2013, compared with $591 million for 2012. The increase was primarily due to a $97 million favorable impact from higher average earning assets and a $67 million decrease in the provision for credit losses. These increases were partially offset by a $14 million unfavorable impact from returned or repossessed equipment." ("Caterpillar Form 10K," 2014) These insights are showing how the company is increasing earnings through various shifts in accounting practices vs. A sharp improvement in demand.

Moreover, Caterpillar is taking advantage of changes in the tax code to enhance their results with them saying, "The provision for income taxes reflects an annual tax rate of 25% for both 2013 and 2012. The 2013 annual tax rate of 25% excludes a benefit of $7 million, reflecting the impact of the American Taxpayer Relief Act. New retail financing for 2013 was $13.09 billion, a decrease of $868 million, or 6%, from 2012. New retail financing decreased across all operating segments with the exception of North America, which increased. At the end of 2013, past dues were 2.37%, compared with 2.45% at the end of the third quarter of 2013 and 2.26% at the end of 2012. Write-offs, net of recoveries, were $123 million for 2013, compared with $102 million for 2012. Full-year 2013 write-offs, net of recoveries, were 0.46% of average annual retail portfolio, compared with 0.42% in 2012. The increase in write-offs was primarily related to our European marine portfolio and was previously provided for in the Allowance for credit losses. At year-end 2013, our Allowance for credit losses totaled $378 million or 1.30% of net finance receivables, compared with $426 million or 1.49% of net finance receivables at year-end 2012. The overall decrease of $48 million in allowance for credit losses during the year reflects a $55 million decrease associated with the lower allowance rate, partially offset by a $7 million increase in allowance due to an increase in our net finance receivable portfolio." ("Caterpillar Form 10K," 2014)

These figures are significant, as they are demonstrating how the diversified business model is helping the firm to adjust to shifts in customer demand. This is one of the keys that are making them successful by providing quality and better support. This helps Caterpillar to remain the most dominate player in the marketplace with them saying, "Our value proposition is based on the belief that our customers will make more money with CAT equipment than they would with our competitors' equipment. Quality is a key component of that proposition because customers can only make money when their equipment is in operation. Our products tend to operate as part of a system -- an excavator loading a truck or a wheel loader loading a hopper. So if one CAT machine goes down, the customer's whole operation could potentially go down. There is no Caterpillar value proposition without quality products and quality service. No matter where our customers are located around the world, the expectation of quality is always the same. So for us, quality is the price of admission. The primary factor is the strength of the CAT product portfolio. The depth and breadth of that line is a key part of our strength -- from the smallest machines to the largest mining equipment, from generators to engines that power ocean-going vessels. It's a testament to the fact that building machinery at Caterpillar is a team sport -- a collaboration between product, component and…