Is Caterpillar Ready for a Metamorphosis?
Douglas 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) has been receiving a significant amount of attention since it announced a resolution with one of its labor unions and the stock’s solid Friday performance helped to drive the Dow Jones Industrial Average (INDEX: ^DJI) to another winning week. What must now be determined is whether the news is a catalyst that warrants entering the stock, or if the price bump was temporary. Ultimately the stock looks well positioned to face the challenges ahead, appears attractive against many of its competitors and has significant upside potential from current levels.
A Labor Relations Victory
The impasse that kept nearly 800 workers at Caterpillar’s Joliet, Ill., plant on strike for four months was finally concluded with the signing of a six-year labor contract. Employees are expected to return to work immediately after negotiating a bonus of roughly $3,100 per ratifying union member. The strike, which began on May 1 and included a ratification payment of $5,000, was rejected because workers claimed it did not sufficiently address pay raises and increased health care costs. Under the newly accepted plan, employees that were hired after 2005 will receive automatic pay raises of three percent per annum; those hired prior to 2005 are already receiving an above-market wage.
Through the use of temporary workers and office staff, the company reports that it was able to maintain production levels at the plant that manufactures parts for Caterpillar mining trucks and loaders. The company’s ability to maintain production levels may have been impacted by reduced demand; several mining companies have suspended orders due to slowdowns in new mine development plans. Still news of the resolution played a significant role in driving the stock higher during Friday’s session. The company’s 1.6% advance added several points to the Dow’s 25-point rise to close out another winning week.
An Excuse or a Symbol?
For a company that boasts over 130,000 employees worldwide, one is forced to consider whether sending 800 people back to work is of any real importance. The news may have given those already bullish on the stock enough momentum to drive things for the day, or it may represent a deeper victory for management. If the company is now able to more effectively manage its workers, the victory should be seen as the type of catalyst needed to drive the stock higher over the long-term. In either case, the increased attention that the story has brought to the stock is a positive, particularly when one considers the fundamental strength that Caterpillar possesses.
Caterpillar’s Relative Position
While Caterpillar’s trailing twelve month price-to-earnings (P/E) ratio of 10.1 is not particularly impressive relative to competitors like CNH Global NV (NYSE: CNH) or The Manitowoc Company (NYSE: MTW) at 9.1 and 22.1, respectively, the growth metrics are particularly appealing. Caterpillar has year-over-year quarterly revenue growth of 22%, compared to 2% for CNH and 6% for Manitowoc. Both of these competitors have made a significant push to increase their global reach, and yet neither has been able to maintain the growth numbers of Caterpillar.
This is further reflected in the PEG ratio of the three companies -- at 0.54 for Caterpillar, 0.69 for CNH and 1.01 for Manitowoc, when growth is added to the mix, Caterpillar looks like it gives investors a very favorable outlook. Lastly, where Caterpillar may really eclipse these competitors is in the combination of growth and income. Caterpillar offers a dividend yield of 2.4% relative to 0.6% for Manitowoc and no dividend for CNH. The combination of a solid income element and strong grow figures make Caterpillar look like the right candidate in this space.
While there are certainly some significant headwinds to the space – ranging from a global construction slowdown to reduced mine development activity – maintaining exposure to this industry remains a critical part of a balanced portfolio. Within the space, Caterpillar appears to be well positioned to perform over the medium to long-term. While taking a scaling-in approach may be the most sound, particularly after last week’s run, Caterpillar is a solid play and an appropriate addition to any core portfolio.
Mr. Ehrman 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.