Which Machines Can Make You Rich?

Marina is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Amidst a difficult macroeconomic climate, is Caterpillar (NYSE: CAT) still the right construction stock? How is Cummins (NYSE: CMI) able to withstand a decline in mining output? Should you invest money in farmland equipment instead, to reap the rewards of a bonus crop? In this article you will find the answers for these questions. 

Recent events

Caterpillar relies heavily on the growth prospects of China. For the last four months, China’s growth has failed to meet analyst expectations, causing Caterpillar’s retail sales in the Asia/Pacific region to fall by an estimated 23%.

This also marked the company’s first quarterly earnings with a decline. The company’s earnings from the oil sector were also in the negative. The global slowdown is hurting the construction-equipment maker adversely. As the stock price declines, the company has approved a stock buyback worth $1 billion. Being the largest provider of construction and mining equipment, Caterpillar relies on a derived demand to supply its machinery.

The global economy has failed to pick up despite numerous attempts by policymakers and bankers across the world. Unless there is increased consumption, investment or government demand in the system, construction companies like Caterpillar stand to suffer as their sales will plummet.

Bumper crop ahead

Deere (NYSE: DE) is having to face tumultuous weather conditions and continuously stern opposition from lower demand in the international market. Last year, the drought lifted commodity prices while crop insurance helped guarantee farmer income despite low yields, giving them more money to spend. This time however, things can be very different - in its last quarterly earnings, Deere’s profits rose 2.7%.

The company’s equipment sales are expected to grow another 5% in the remainder of 2013, which would further add to the impressive financials of the farmland-machinery manufacturer. In the U.S., a bumper crop is expected in 2013, which would continue to increase the purchasing power of farmers and inadvertently increase demand for farmland machinery.

Solid demand

Cummins provides industrial and mining equipment along with the sale of large engines to manufacturers. Unlike Caterpillar, the majority of the company’s revenue comes from sales in the U.S. In fact, only 6% of its revenue comes from China, which make it much less vulnerable to shocks from the developing country.

That being said, the company has been witnessing a quarter-on-quarter and year-on-year decline in its engine sales and other products. However, its overall demand remains strong as it does not sell vehicles itself but provides engines to a lot of truck makers. As long as there is strong demand from the truck manufacturers, Cummins will maintain a positive outlook.

Competition 

Indicator

Caterpillar

Deere

Cummins

Price/Earnings ttm

11.5

10.5

15.2

Price/Book

3.1

4.0

3.4

Net Income Growth (3 Yr Avg.)

85.2

52.0

56.6

Revenue Growth

(3 Yr Avg.)

26.7

16.1

17.1

Dividend Yield, %

1.83%

2.21%

1.69%

Return on Equity

29.9

41.0

23.3

Current Price

$85.01

$85.44

$117.1

Data from Morningstar and Financial Visualizations on June 18

Cummins is the most expensive of all the stocks here, while being unable to offer a yield or earnings to top its rivals. While the company has the advantage of geographical diversity, it could also be its downfall as it fails to capitalize of China’s strong growth, which can be switched on after the approval of government spending.

Caterpillar, on the other hand, has shown good growth in its net income over the last three years despite having recent trouble in China. Furthermore, the construction giant is the cheapest stock on offer. Deere is not far off in being the cheapest stock available, but at the same time it offers a significantly better yield and is highly undervalued.

Final thoughts

At a time when global output is declining, the agriculture industry continues to show signs of strength. Deere’s record earnings in the last two quarters are a testament to the company’s ability to hold its own despite financial and global pressures. I believe Deere has long-term potential which cannot be matched by its rivals and its products become increasingly necessary as farmers employ drought countering seeds. Deere is a clear buy in my opinion.

Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in The Motley Fool's brand new report. Just click here to access it now.



Marina Avilkina has no position in any stocks mentioned. The Motley Fool recommends Cummins. The Motley Fool owns shares of Cummins. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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