Overview
Even with a slowdown in China, depressed oil and gas prices and broad economic weakness globally, Caterpillar Inc. (CAT, Financial)  delivered 58% returns in the last 12 months. The stock surged from oversold levels in the early part of 2016. The company remains a value creator and can be considered a buy at current levels for 2017 and beyond.
The China factor
Due to the recent decline of the Chinese economy, Caterpillar has faced challenging times. With hopes of sustained economic recovery however, the company has positioned itself to benefit. China's official manufacturing Purchasing Managers' Index came in at 51.3 in January 2017. With the PMI sustaining above 50, economic activity seems relatively robust.
China Daily also reported there are expectations of stronger-than-expected GDP growth for first-quarter 2017. While recovering economic growth in China does not immediately imply that the mining sector will see pre-crisis level activity, I expect Caterpillar to bottom out and gradually recover.
Fiscal 2017 guidance digested
When Caterpillar reported fourth-quarter 2016 results, the company provided a conservative guidance for fiscal 2017. Caterpillar expects revenue to be in the range of $36 to $39 billion and adjusted profit per share of $2.90. For 2016, the adjusted profit per share was $3.42.
The guidance for 2017 is conservative. With this factor discounted in the stock, I do not expect downside momentum.
Contrary to that, if oil trends higher, I expect Caterpillar to report better-than-expected results in the second half of 2017. This assumption also factors in sustained recovery in China along with growth in other emerging economies.
Overall, I do not believe the guidance will be revised lower. There is a good probability of guidance being revised on the upside, which will take the stock higher.
Strong value creation
Caterpillar might have seen challenging times in the recent past, but shareholder value creation though dividends and share repurchases have been robust and are likely to be strong in the year ahead. With a current dividend payout of $3.08 and dividend yield of 3.1%, the stock is worth considering.
I do not expect dividends to increase in 2017, but current dividend levels will sustain and share repurchases will continue over the course of the year. If economic recovery sustains globally, there is a strong possibility of a dividend increase in fiscal 2018.
Strong order backlog
As of the end of 2016, Caterpillar had an order backlog of $12.1 billion, a $900 million decline from fiscal 2015. The company’s order backlog for fourth-quarter 2016 increased $500 million  from third-quarter 2016. This might be an early indication of relative strengthening in the company’s markets.
The decline in 2016's order backlog was due to declines in the energy, transportation and construction industries. With the energy industry witnessing recovery, the backlog should improve along with the resources industry.
With a decent order backlog into fiscal 2017, Caterpillar is well positioned to meet revenue guidance.
Conclusion
Caterpillar has strong fundamentals and robust dividends. If economic recovery in China sustains along with recovery in the energy industry, the company can potentially see EPS growth reversal later in 2017 or early 2018. As a result, Caterpillar is worth considering for the medium to long term.
Disclosure: No positions in the stock.
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