Buying Opportunity in Caterpillar
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The chart from Ycharts shows the evolution of price, earnings per share and the ratio between those variables - P/E ratio- for Caterpillar (NYSE: CAT) over the last five years. The company has recently become quite cheap, because price has fallen while earnings per share have kept rising.
In fact, Caterpillar is trading at a P/E ratio of barely above 11, which is not much higher than the minimums observed during the last recession. The company is facing a slowdown in demand from different markets, but sales and earnings are still growing quite strongly. At historically low valuations, Caterpillar may provide an attractive entry point for patient investors.
The company recorded machines sales growth of 12% for the quarter ended in April, keeping up its 24-month run of positive sales growth, total revenue was increased by 23% to a record $15.98 billion. Growth has been slowing lately, mostly due to tougher year over year comparisons and lower demand from Europe, China and Latin America. Still, the company is doing quite well in its biggest market: North America. Furthermore, Caterpillar's backlog is looking pretty strong; it stood at $30.7 billion at the end of the first quarter, up from $29.8 billion at the end of fiscal 2011.
Japanese competitor Komatsu (NASDAQOTH: KMTUF.PK) has increased its market share in China lately and is now bigger than Caterpillar in that high growth market. China will be the main driver of demand for machinery equipment in the following years, so the fact that Caterpillar has lost market share in that country is not precisely good news for investors. However, the company is still the biggest one on a world wide scale and will keep capitalizing exciting opportunities from many emerging markets around the globe.
Caterpillar has increased the proportion of sales coming from services as opposed to new machinery sales, so this brings stability to the company´s financials in case the economic scenario turns for the worse. Furthermore, the company holds a very strong position in construction equipment in the US and Europe, those markets have been really depressed since the financial crisis, and they have abundant upside room once things turn around, which they will sooner or later.
The acquisition of Bucyrus will generate some integration risks in the middle term, but it also gives Caterpillar a strong foothold in the global mining and commodities markets. Although it will facing strong competition in that industry from companies like Joy Global (NYSE: JOY) which has sustained double digit growth rates in sales over the last years due to both organic expansion and acquisitions, Caterpillar has what it takes to compete efficiently against any challenger.
Caterpillar has the strongest competitive advantage in its industry due to its unparalleled size, geographical reach and brand recognition. Economic conditions may provide heavy headwinds over the following months, but there is nothing that could make me thing that Caterpillar will lose its leadership position and growth opportunities.
The recent price decline looks exaggerated considering the company´s financial performance, and it provides an opportunity to buy shares of this high quality industry leader at a very attractive valuation with a long term investment horizon in mind.
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