Build Your Value Portfolio With Caterpillar
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Industrial stocks have been badly hit since the beginning of the crisis, making many of these companies available at a substantial discount. Although a lot of companies are a bit pricier than they were before this recent rally, there are still many large corporations available on the cheap right now. One of these is Caterpillar Inc (NYSE: CAT). Caterpillar is the world’s largest producer of mining and construction equipment with a market cap of almost $60 billion. Although the firm faces a few headwinds in the current economic climate, it appears to be growing revenue and is available at a bit of a discount at the moment.
Caterpillar trades at 10.1x earnings compared to an industry average of 14.7x and a sector average of 17.1x, putting the stock at a significant discount compared to its peers. Caterpillar's main US competitor, Deere & Co (NYSE: DE), trades at an attractive 10x earnings but is bogged down by a huge LT Debt to Equity ratio of almost 250. Additionally, 2012 Q3 earnings from Deere missed by over 30 cents, and the company adjusted their outlook downwards. These disappointing figures are mainly attributed to slowing sales and inefficiency regarding the introduction of new products.
Another US competitor, CNH Global, also seems well positioned for profitability, but worryingly does not offer a dividend. Additionally, the company has an unusually high beta of 2.58 which is not an asset in the current market environment. Indian competitor Tata Motors (NYSE: TTM), who manufactures cars as well as industrial equipment, has a P/E of 28.4x, almost double the industry average. Also, Tata's EPS growth has trailed the industry for the last five years, while Caterpillar has generally been able to keep up. Caterpillar offers a decent 2.34% dividend yield and has raised dividends for the last 18 years.
After a rough period in which Caterpillar suffered heavily due to the collapse of the US housing market, the firm managed to turn around through cutting costs and improving efficiency. Now the company is setting record growth, among other things due to rising commodity costs which have made mining more attractive, and worldwide growth in infrastructural investment. In Q2, net profit soared 67% to $1.7 billion convincingly beating the consensus. The company reported an EPS $7.40 in 2011 which beat the consensus by a generous 9%. 2012 Q1 and Q2 EPS both beat by around 11%.While growth is slowing somewhat in China and Brazil, this was more than compensated by rising sales in other emerging markets. Demand in the home market of the United States remains strong as well.
Unfortunately, we live in uncertain times, as the CEO of Caterpillar himself has underscored. The company generates around two thirds of its revenue outside of the United States, and margins are under pressure due to slowing demand in China and Brazil. The European debt crisis continues to eat away at profits, and generally, CEO Doug Oberhelman is not particularly optimistic about the global financial situation in the short term. As mentioned above, the firm also has a worryingly large amount of debt. Other risks include continued weakness in the US housing market and rising cost of materials.
Overall, Caterpillar is a very profitable company that I would recommend to investors willing to take on a little more risk. The company is very sensitive to slowing growth worldwide, but through innovation and efficiency has managed to remain competitive today. Earnings are looking good over the last 1.5 year or so and the outlook for 2012 remains cautiously optimistic. Current prices may be an attractive entry point.
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