Caterpillar Inc.

If a recession is right around the corner, somebody forgot to tell Caterpillar Inc. (CAT - Analyst Report). The company delivered record revenue and profit for the third quarter of 2011 and EPS crushed the Zacks Consensus Estimate by 21%.

Management also provided a positive outlook going forward and stated that its order backlog is at an all-time high. This prompted analysts to revise their estimates higher for both 2011 and 2012, sending the stock to a Zacks #2 Rank (Buy).

The company also pays a dividend that yields a solid 1.9%. The valuation picture looks reasonable too with shares sporting a PEG ratio of just 0.5.

Company Description

Caterpillar Inc. is a leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.

It is headquartered in Peoria, Illinois and has a market cap of $61.5 billion.

Third Quarter Results

Caterpillar delivered record financial results for the third quarter of 2011 on October 24. Earnings per share came in at $1.93, crushing the Zacks Consensus Estimate by 34 cents. It was a remarkable 58% increase over the same quarter in 2010.

Revenue soared 41% to a record $15.716 billion, including $1.135 billion in sales related to the Bucyrus acquisition. Excluding Bucyrus, revenue was up 30%.

CAT recorded higher sales volumes across the globe and in nearly every segment. Asia/Pacific led the way with 55% revenue growth, but North America was also strong with 32% growth. Over 64% of revenue came from outside North America.

Meanwhile, operating profit surged 48% as the company leveraged its fixed costs.

Outlook

Caterpillar is a cyclical company heavily dependent on the global economy. With all of the recent recession fears in the U.S., management at Caterpillar provided extensive guidance for the remainder of 2011 as well as a preliminary outlook for 2012.

CEO Doug Oberhelman stated that "the outlook for 2011 sales and revenues and profit has improved." Management raised its earnings guidance to $6.75 share, up from its previous guidance of $6.25 to $6.75.

Oberhelman went on to state that "although there is a good deal of economic and political uncertainty in the world, we are not seeing it much in our business at this point. We believe continued economic recovery, albeit a slow recovery, is the most likely scenario as we move forward."

Management expects revenue growth of 10-20% in 2012 as it expects growth in developing countries to be similar to what it was in 2011. The company also noted that order backlog is at an all-time high.

This positive outlook prompted analysts to revise their estimate higher, sending the stock to a Zacks #2 Rank (Buy). The Zacks Consensus Estimate for 2011 is now $6.85, slightly above guidance. This corresponds with 63% growth over 2010 EPS.

The 2012 consensus estimate is currently $9.04, representing 32% EPS growth.

Dividend

In addition to strong earnings growth potential, CAT offers a dividend that yields a solid 1.9%.

The company has a history of steadily raising its dividend. Since 2000, Caterpillar has increased it at an average annual rate of 9%:

Valuation

The valuation picture looks reasonable for CAT. Shares trade at just 11.2x 12-month forward earnings, in-line with the industry average and a discount to its 10-year median of 13.7x.

It sports a PEG ratio of just 0.5 based on a 5-year growth rate of 21%.

The Bottom Line

With a positive outlook, strong growth potential, rising estimates and a solid dividend, CAT looks very attractive with a PEG ratio of just 0.5.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.

Read the full analyst report on CAT