The Bullish and Bearish Case for Caterpillar in 2014

Jon C. Ogg
January 6, 2014

Now that a stellar 2013 has come to an end, 24/7 Wall St. has generated a bullish and bearish scenario for 2014 in each stock of the Dow. This leaves up for grabs what to make of Caterpillar Inc. (CAT) this year. With the S&P 500 index rising by almost 30% and the Dow Jones Industrial Average (DJIA) rising by 26.5%, both major indexes closed out at the highest closing levels of all time. The question now is what to expect in 2014.

Caterpillar was one of the worst stocks of the Dow in 2013. Perhaps the emerging market recovery story can take hold in 2014. Most Wall Street strategists are forecasting higher price targets for the S&P 500, and the hope is that the rising tide can even lift a behemoth like Caterpillar.

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The Federal Reserve is about to get a new chairman, and it is widely expected that interest rates will rise in 2013, even if that rise is not massive. The world markets are exiting their recessions at the same time that U.S. gross domestic product is expected to tick up.

Caterpillar's outlook is one that investors are examining closely in 2014. Its gain in 2013 was only 2.7%, and its current dividend yield for 2014 is 2.6%. After it closed out the year at $90.81, its consensus analyst price target is $90.59, and the 52-week trading range is $79.49 to $99.70.

One issue to consider with Caterpillar is that investors decided to bottom fish on the price rather than on fundamentals. Its gain in the past month was more than 7%, taking it above the consensus price target for the year ahead. Caterpillar's $58 billion market cap is high, but not too high to drive investors away.

The bullish case for Caterpillar remains around the emerging markets. If mining and infrastructure can recover, then it could face a serious snap-back rally. The 52-week high is 10% higher than the current price, and analysts used to think that Caterpillar was going to rise to $115 or $120. Another potential positive is that investors may start betting into 2014 that the story is set to improve in 2015, which could propel shares even further.

The bearish case remains in place about the emerging markets and mining decline. We have yet to find any serious expectations of a serious boost in 2014. It is hard to believe that the late year gains took the stock above the consensus analyst price target. Caterpillar also trades at about 16 times earnings, with very little current upside expected. What if all the bad news is not adequately priced in after awful sales trends seen in December?

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