Moving the Earth
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are two U.S. companies associated with earth moving equipment: Caterpillar (NYSE: CAT) and Deere & Company (NYSE: DE). They both make big machines, but their fortunes have been divergent so far this year. That said, both appear to have solid long-term growth potential.
Caterpillar is one of the world’s largest manufacturers of construction and mining equipment, engines, turbines, and locomotives. It breaks its business down into two divisions: Machinery and Power Systems, and Financial Products. The company has a large dealer network, covering the world with almost 200 locations. Only about a quarter of those locations are in the United States, which speaks volumes about the company's global reach.
The Machinery and Power Systems division is the core of the company's business and creates the giant yellow machines seen all around the world. Some examples of what Cat manufactures include backhoe loaders, track excavators, tunnel boring equipment, underground mining equipment, articulated trucks, and pipe layers, among many other products. The financial services provided by the company in the Financial Products division are largely meant to support the core business and consist primarily of insurance and financing. A material portion of Cat's debt is attributable to this segment.
With a yield around 2.5%, the company isn't going to entice too many dividend focused investors. However, it is a financially solid company with a strong position in its market and a long history of dividend increases. Although the stock is only down about 12% on a year to date basis, it is materially off from its first quarter high of around 115. Trading in the mid-$80s, investors looking for a way to capitalize on infrastructure improvement in mature markets and infrastructure growth in emerging markets should be looking at Caterpillar since it has fallen so far from its recent highs.
Indeed, the near term might be a bit of a struggle, based on economic weakness in developed markets and slowing growth in developing markets, but the long-term trend of increased infrastructure spending seems set to continue.
The Gainer (Or Is That Grainer?)
Another company that looks set to take advantage of big ticket machinery sales is Deere & Co. The company breaks down into three major business segments: Agricultural and Turf, Construction and Forestry, and Financial Services. In the Agricultural area, Deere makes such things as tractors, loaders, and combines, as well as commercial mowing equipment, riding lawn equipment, and walk-behind mowers. This segment accounts for the vast majority of the company's top and bottom lines. Construction and Forestry makes products similar in nature to Caterpillar, while the Financial Services segment operates in support of the company's product sales. Deere markets its products to thousands of dealers across the globe, providing it a presence in more than 100 countries.
Like Cat, Deere's yield of slightly above 2% isn't going to draw in the dividend crowd, but it is a great company with plenty of potential. After trading below $30 in mid-2009, the stock seemed to be back on an upward track until it closed in on $100 a share in 2011. Since that time, it has been largely range-bound, between $70 and $90 a share. Investors who think agricultural demand and the price for equipment that optimizes land yields are headed higher in the future should probably consider a stake in this industry leader. Others might wait for a pull back to the $70 area.
The long term need for Deere's products is pretty clear since emerging economies will likely have to focus on increasing crop yields over time. It is the only way to make full use of the limited arable land available to support changing diets, which can be a formidable farming challenge. For example, increased meat consumption, which usually occurs as nations develop, requires countries to produce materially more grain per person because of how much cattle and other animals eat in preparation for slaughter. Moreover, cattle and other animals require land to graze, cutting away potential farm acreage. Optimizing farm land is likely to become an increasingly important topic.
Some Other Names To Watch
Komatsu (NASDAQOTH: KMTUY) is a well established competitor to Caterpillar, and is worth keeping an eye on. The Japanese heavy equipment maker may even have something of a leg up on its U.S. competition in some Asian and emerging markets. For example, it has a material market share in China. Like Cat, Komatsu has a global footprint. Moreover, it can boast equipment that is on par with its U.S. competitor in some markets. The company's dividend has been a little volatile, falling materially in 2009, is priced in a foreign currency, and is subject to foreign tax withholding issues. This probably isn't the best choice for income investors, but those looking to tap infrastructure growth in emerging markets may wish to take a look.
Though not exactly a direct competitor to Deere, Ag Growth International (NASDAQOTH: AGGZF) makes grain handling equipment. Operating out of Canada, the company was once a Canadian Royalty Trust and still pays a material, monthly dividend. The company manufacturers grain handling, storage, and conditioning products. Its business is dominated by the U.S. farm market, though it sells globally. Income oriented investors will likely find this stock most enticing, despite a distribution that appears to lack any growth. Note that, like Komatsu, the dividend is paid in a foreign currency and is subject to foreign tax withholding.
ReubenGBrewer 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!