Pat McKeough responds to many personal questions on buying stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions.

This past week, an Inner Circle member asked us about a company that clearly benefits when the global economy is doing well. This American heavy-equipment manufacturer already makes the majority of its sales outside the U.S. and it’s looking to developing economies to fuel even more growth.

Q: Pat: What do you think of Caterpillar’s prospects? It has a lot of international business. Thanks.

A: Caterpillar Inc., (symbol CAT on New York; www.caterpillar.com), is the world’s largest maker of earth-moving equipment, including tractors, scrapers, graders, compactors, loaders and pipe layers. It also makes lift trucks and diesel and turbine engines.

The company gets 70% of its sales from outside the U.S. Its clients are mainly in the mining, logging, farming, construction and oil and gas industries.

Caterpillar sells its machines through a worldwide dealer network. It also provides dealers and customers with equipment financing and insurance.

In July 2011, the company acquired Milwaukee-based Bucyrus International, which makes equipment that is used for mining and in the development of the oil sands. This purchase made Caterpillar the world’s largest mining machinery supplier. Caterpillar is now rebranding all of Bucyrus’s equipment under the Caterpillar name.

The company paid $7.4 billion in cash for Bucyrus. If you include $1.6 billion of Bucyrus’s debt, the total purchase price was $9.0 billion.

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Caterpillar adds Chinese coal-mining equipment company to previous acquisitions

In November 2011, Caterpillar completed its $774-million purchase of MWM GmbH, a German company that makes engines that run on natural gas and other alternative fuels.

In the three months ended March 31, 2012, Caterpillar’s sales rose 23.4%, to $16.0 billion from $12.9 billion a year earlier. Bucyrus and MWM contributed $1.1 billion to the gain. Caterpillar also saw continued strong demand for its heavy equipment.

Earnings jumped 29.5%, to $1.6 billion from $1.2 billion. Earnings per share rose 28.8%, to $2.37 from $1.84, on more shares outstanding.

Caterpillar borrowed most of the cash it needed to buy Bucyrus and MWM. That pushed up its long-term debt from $20.4 billion at the end of 2010 to $25.2 billion on March 31, 2012. But even with the increase, the company’s long-term debt is still a manageable 47% of its market cap. Caterpillar also holds cash of $2.9 billion, or $4.39 a share.

Chinese regulators recently approved the company’s offer to buy ERA Mining Machinery Ltd., which makes and repairs underground coal-mining equipment. Caterpillar will pay roughly $890 million for ERA when the deal closes in the next few weeks.

Caterpillar’s annual dividend rate of $1.84 a share yields 2.5%.The stock trades at 8.5 times the $9.72 a share that the company will probably earn in 2012. Caterpillar’s earnings could rise as high as $15.00 a share by 2015.

In the most recent Inner Circle Q&A, Pat examines whether contracts from developing countries with big infrastructure projects can offset slower growth in Brazil and China and sluggish results from the U.S. and Europe. He also looks at whether the company’s equipment sales to mining companies will remain strong. He concludes with his clear buy-hold-sell advice on the stock.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members

Caterpillar is a huge multinational company with a brand that is known worldwide. However, it is also a cyclical company whose fortunes rise and fall in tune with the health of the world economy. In addition, it does much of its business and pays dividends in U.S. dollars, and this poses a foreign-exchange risk for Canadian investor.

Are any of these factors deal-killers when you consider Caterpillar as an addition to your portfolio? Let us know what you think in the comments section below. Click here.