4 Reasons to Fall in Love With Caterpillar

What a difference two years can make. When the Great Recession�s waves and breakers swept over cyclical stocks like steel and machinery a couple of years ago, earth-moving equipment giant Caterpillar (NYSE: CAT) started sinking in quicksand. As former Chairman and CEO Jim Owens said at the time, 2009 was “the worst year in Caterpillar�s history since the Great Depression.”

The numbers bore out his grim assessment: CAT had 2009 sales of $32.4 billion and earned only $1.43 a share � 75% lower than its earnings per share in 2008. The company laid off 19,000 full-time and 18,000 part-time and contract employees; between June 2008 and March 2009, Caterpillar shares fell more than 72% to $20.74.

But CAT stayed focused and disciplined, and as the global economy began to swing back from the brink, the company started to rebound. And Caterpillar stock, which has risen by a whopping 440% since March 2009, CAT stock morphed from earthbound worm into free-flying butterfly.

Here are four reasons to fall in love with Caterpillar stock:

The China Opportunity

Growth in China has cooled off a bit in recent weeks as the government has delayed major public works programs. Tighter credit also has dampened heavy machinery sales. Stiff competition from Japanese heavy-equipment manufacturer Komatsu�notwithstanding, CAT has staked a claim in China. And despite the near-term delays, China still plans to build 10 million public housing units in the next couple of years. CAT reportedly plans to spend $1 billion to increase its manufacturing capability in the country and has formed a joint venture with AVIC Liyuan Hydraulics for hydraulic pumps.

Fortescue Metals Deal

Last Tuesday, CAT announced it has inked a deal with Australia-based Fortescue Metals Group to implement an autonomous mining solution to boost performance and productivity in the latter�s Solomon iron ore mine. The two companies will work together to develop a solution that is tailored to the specific business needs of mining companies.

The Rebuilding of Japan

Recovering from the March 11 earthquake, tsunami and nuclear disaster in Japan will require a massive rebuilding effort that could rise above $210 billion. Even though Japanese competitors Hitachi (NYSE: HIT) and Komatsu will be favored sons in the bidding, there�s still a lot of work to go around. Caterpillar construction and heavy earth-moving equipment will be needed to rebuild from the disaster.

Solid Fundamentals

Caterpillar is trading about 85% above its 52-week low of $59.21 last July. With a market cap of $74.94 billion, the company pays a dividend yield of 1.70% and has a price-to-earnings growth ratio of only 0.73, indicating the stock still is undervalued. Quarterly earnings growth is a scorching 425% year-over-year, and analysts� growth estimates are off the charts: more than 60% for the current quarter, 40% for the next quarter and more than 66% for the full year.

Obviously, there are no �sure things� when it comes to investments. And cyclical stocks are unpredictable and erratic because they are tied to economic cycles that are unpredictable and erratic. CAT benefits from a strengthening economy, so as long as the recovery continues, investors should continue to be well rewarded.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.