Timing for Caterpillar Could not be Better
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With cyclical industries, investors look for good entry points to invest in companies and position themselves for long term growth. One company that I believe is worth looking at right now is Caterpillar (NYSE: CAT). Always a stalwart of the investing world, it has done a great job turning itself around as it prepares for a time when the economy will do much better.
Aggressive Goals Met
Caterpillar forecast nice, steady growth through 2015 based on a world economy that is growing modestly at best. With a $7.40 EPS in 2011 and $9.50 forecast for this year, it could see $15-$20 by 2015. It set a goal in 2009 to do two things by 2012. The first was to lift sales to $60 billion, which it reached last year. The second was to lift share profits to $10.00. Presently, analysts following the company believe that target is achievable by the end of the year.
Caterpillar’s Headwinds
Caterpillar set and achieved all its goals for the company but has run into an economic wall it now has to contend with. Growth estimates may be premature. We know that Chinese sales fell by $300 million because the economy in China (also the largest coal and metal user) expanded by 8.1% which was the slowest in the last three years. Capital spending by mining companies is anticipated to shrink by 3% through 2013 and this is a sign of equipment sales slowing down. The cycle is in a contraction mode thanks to well publicized things like the European debt crisis or economic instability, and major machine sales for growth or replacement is just not taking place.
Joy Global (NYSE: JOY) is a competitor of Caterpillar and has struggled through the same economic conditions. On May 31, it cut its earnings and sales forecasts because of a contracting U.S coal industry. It also said concerns about Europe and “tempered growth expectations” in China are affecting demand for mined commodities such as copper.
Cyclical industries like these rise and fall. Copper futures are down 19% over the past year. Australian coal is down 31% year-over-year. With this type of news, it would seem that all would be bad for Caterpillar, but its diversity has helped the company keep itself balanced. While coal in the U.S. is down, construction will help fill the hole. When it had a major portion of its business in mining the company really struggled during these slowdowns. But construction equipment sales in both Europe and North America grew after a two and three year drop, respectively. It is this diversity that has helped the company maintain a sense of balance.
Multiple Sales Products from Mergers
Industry diversity is an important strategy when a company is looking to keep sales up. If a business sells one or two products and that industry slows down, so do sales. But diversification keeps sales steady. One strategy some larger businesses use is diversification through acquisition. This is one of Caterpillar's tactics. Look at these four acquisitions:
- The company completed its $8.6 billion purchase of mining equipment maker Bucyrus International Inc. in July, its largest acquisition.
- It expects to complete the purchase of Hong Kong-based ERA Mining Machinery Ltd. (8043) in the third quarter, adding underground coal-mining equipment.
- It acquired German engine manufacturer Motoren-Werke Mannheim Holding GmbH in November for 580 million euros ($724 million).
- In August 2010, it completed the $820 million purchase of locomotive manufacturer Electro-Motive Diesel Inc.
This creates a wide variety in Caterpillar’s line with products ranging from electricity generators for vacation homes to 100-ton trucks used at open-pit mines. Diversification through acquisition is a balanced strategy that the company understands well as it positions itself for business “after the economic slump."
Caterpillar’s Earnings will Always Attract Investors
It is especially true in today’s markets—where investors look for income alternatives to CD’s and low-interest Treasuries. Dividends are where the money is flowing. Well, Caterpillar is a strong, dependable dividend company, increasing its dividends the past 18 years. It can deliver a nice return over the long run, especially if purchased at the right price. Now is a good time for long term investors to take a look at the stock. Since 1998, Caterpillar Inc has increased earnings at a compounded rate of 10.3% per annum.
So it seems that the timing for Caterpillar could not be better for an investor to seriously consider taking a long term position. One's entry point I cannot give, but the season is ripe to look!
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