Caterpillar Set to Skyrocket
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the barometers of the health of the global economy is if infrastructure projects are being carried out. Caterpillar (NYSE: CAT) plays an excellent role of being indicative of how the world is progressing. We all know about the debt crisis in Europe, corruption in India, and the slowing down of China’s growth engine, but the beauty of the company was that amidst all this, Caterpillar was able to post strong earnings which were better than expected.
Caterpillar is a US based firm which involves in designing, manufacturing and marketing of infrastructure machinery. Additionally the company is also involved in the manufacturing of engines and turbines. Caterpillar was formed in 1925, and to add to the diversification, the company sells financial products and provides insurance to industrial customers.
The Industry Outlook
The macroeconomic conditions had forced the infrastructure projects to crawl. World over austerity drives were being conducted, which left little or no room for fresh projects. Thanks to the stimulus packages by the US, Japan, and China, liquidity would be introduced in the markets, which would be complemented by already low or decreasing interest rates. Time and again we have seen that whenever there is a surplus of liquidity with low interest rates, infrastructure spending picks up.
Additionally President Hu Jintao’s plan to spend $156 billion on infrastructure projects is being seen as a big opportunity for Caterpillar to capitalize on. It’s also worth noting that the risky mortgage buying of QE3 is seen as big positive for housing and real estate, and any increase in real estate investment is likely to increase infrastructure projects.
Diversity: The Savior
The company is geographically well diversified with its presence in more than 180 countries. It is due to this diversification that the company has been able to insulate itself from the risks posed by the slowdown in a couple of countries. Earlier it was being feared that the increasing inflationary pressures and the slowing Chinese economy could affect the topline as well as the bottomline of the company.
Despite these prevailing conditions, Caterpillar was able to post quarterly revenues of $17.37 billion, beating the street’s estimates with a 21% jump from last year’s quarter. Talking about the bottomline, EPS stood at $2.54 which surged a mammoth 67% compared to the same period last year. The management at Caterpillar believes that the second half of 2012 would be better than it previously anticipated and increased the EPS target from $9.50 to $9.60 for the complete year.
The Expansive Drive
The company recently announced it would be increasing the production of hydraulic excavators by 80%, which would be carried out by expanding its manufacturing facility in China. To add to the story, the company also announced the expansion of both product line and production capacity of its construction equipment manufacturing subsidiary, Shandong Engineering Machinery. Additionally the company was involved in the expansion of its facilities in Illinois, Indonesia, Mexico and Russia.
Caterpillar’s Bucyrus acquisition worth over $1 billion has allowed the company to surpass Joy Global to become the leading mining equipment manufacturer in the world. The company believes the acquisition would add at least $450 million to Caterpillar’s annual profits. The payback period for the acquisition is well below 3 years which is considered to be very good.
Fundamental Gameplay
Caterpillar faces competition from Joy Global (NYSE: JOY) and CNH Global (NYSE: CNH).
|
Company |
PEG |
EPS growth expected next yr. |
Dividend Yield |
ROE |
|
Caterpillar |
0.51x |
9.15% |
2.27% |
40.75% |
|
CNH Global |
0.61x |
5.1% |
0% |
13.13% |
|
Joy Global |
0.59x |
-2.63% |
1.18% |
34.25% |
Though the companies look similarly valued, it is the analyst dividend yield and the returns on equity that set Caterpillar apart from its peers. Being bullish on Caterpillar, analysts expect the EPS to grow in excess of 9% over the next year, which is again significantly higher than the EPS growth expected from its competitors.
The Foolish Takeaway
CLSA, Credit Suisse and Barclays, all have an outperform rating on the stock. From all the mentioned compelling reasons, the company looks well poised to take advantage of the opportunities presented by the industry. Slap in positive estimates of 17% cumulative increase in dividend yields for the next five years makes the company all the more attractive to long term investors. We have a foolish buy rating for Caterpillar.
Foolish Bottom Line
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 Fool’s brand new report. Just click here to access it now.
PiyushArora 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.
