Caterpillar Poised to Profit from the Infrastructure Boom
Chuck is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Caterpillar (NYSE: CAT) is one of the most recognized worldwide Brands of heavy construction equipment required to develop the world’s infrastructure needs. However, what many do not know is that Caterpillar’s deep product line goes far beyond the bulldozer that they are known for. The following description taken directly from their website nicely summarizes this leader in heavy construction equipment:
“For more than 85 years, Caterpillar Inc. has been making sustainable progress possible and driving positive change on every continent. With 2011 sales and revenues of $60.138 billion, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company also is a leading services provider through Caterpillar Financial Services, Caterpillar Remanufacturing Services, Caterpillar Logistics Services and Progress Rail Services.”
Although Caterpillar’s operating history is moderately cyclical, they are by far and away the strongest and most dominant player in their industry. The following F.A.S.T. Graphs™ (Fundamentals Analyzer Software Tool) provides a foolishly simple picture of the company’s business and how the stock market has historically treated it.
The orange line plots earnings per share since 1998; the black line shows monthly closing stock prices, the light blue shaded area shows dividends paid out of earnings. Two conclusions become strikingly clear from this graph. First, we see that over the long term price follows fundamentals (earnings). Second, and perhaps most importantly we see that the price is significantly below its earnings justified valuation (the orange line).
Therefore, today’s low PE of 9.9 coupled with a 2.1% dividend yield, represents one of the best value opportunities to invest in this leading infrastructure facilitator during modern history. Buying low in order make it more likely to sell high is a cornerstone principle of the true fundamental investor.
The following table provides Caterpillar’s long-term performance results associated with the above graph. Not only did long-term Caterpillar shareholders enjoy a total return three times higher than the S&P 500 since 1998, total dividend income was also more than twice what the S&P 500 paid.
Caterpillar Inc. Heads and Shoulders Above Its Competition
The following table compares Caterpillar Inc. against its major US competitors. Here we discover that estimated earnings growth for Caterpillar ties for the highest among its competition. But more remarkably, this is true even though Caterpillar is orders of magnitudes bigger than any of its competitors.
Thesis for Growth
According to Trends Magazine the next 20 years will see an unprecedented global investment in infrastructure. They forecast that investment in infrastructure between 2010 and 2030 will total between $70 trillion and $100 trillion. They attribute this to two primary factors that will fuel this boom:
- The aging of the infrastructure in the developed world
- Economic growth, especially in the developing world
Trends goes on to say, and I quote:
“New and better infrastructure will be needed everywhere, not because it is an end unto itself, because it provides the means for people to realize radically improve lifestyles. In short, infrastructure will drive prosperity and growth, which will have a positive impact on quality of life globally. This includes social well-being, health and safety of citizens.”
Therefore, I believe the long-term growth potential of this industry leader is both well defined and large. Not only is there no competitor that is better positioned to exploit the infrastructure needs of the entire world, there is also none that can be purchased at such an attractive fundamental value. I believe that Caterpillar offers the prudent long-term investor a trifecta of investing opportunity: 1. A well defined market promising above-average growth. 2. An above-average and growing dividend yield. 3. Very low relative valuation.
ChuckCarnevale has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.