Don’t throw out the CAT

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

With shares down nearly 10% this year, nearing 52-weeks lows, Caterpillar (NYSE: CAT) is falling out of favor with investors as the global slowdown puts pressure on the firm’s earnings.

Personally I was cautious about this stock. I do not want to be falling into the age old value trap. On the other hand, there is a certain nostalgia related to CAT. I’m sure many people will have played with dump trucks as kids, it was usually CAT who had their logos on the side.

Now I’m not going to invest in a company because I played with their toys when I was younger. However, doing some research on Caterpillar, you start to build a picture that Caterpillar is no ordinary company. CAT has been through tough trading conditions in its past and it has pulled through each one, coming out stronger on the other side.   

To be the best in the world you need experience and size. These are two things Caterpillar does very well indeed.

A brief history of CAT:

  • 1906 - Caterpillar machinery was used during recovery efforts after the San Francisco Earthquake.
  • 1929 - The Soviet Grain Trust purchases 2,050 Caterpillar machines. This sale helped to keep Caterpillar's factories busy during the Great Depression.
  • 1931 - Help build Hoover Dam
  • 1933 - Help build Golden Gate Bridge
  • 1939-1945 – Caterpillar machinery assists Allies on the front line and at home throughout the war.
  • 1969 - Caterpillar engines supply power for the Apollo 11 mission to the moon.
  • 1994 - More than 100 Caterpillar machines are used to help construct the Chunnel
  • 2008 - CAT machines help construct the 47-mile-long Arabian Canal through Dubai's Arabian Desert.
  • 2008- Caterpillar machines help construct a 2,400-kilometer rail line through the Nafud Desert in Saudi Arabia.

CAT has a rich history, full of experience.  As for size, Caterpillar currently has more than 500 locations worldwide, with customers in 180 countries and a portfolio of 300 products. But how is the stock priced compared to its competitors?


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<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>CAT</strong></p> </td> <td> <p><strong>Industry</strong></p> </td> </tr> <tr> <td> <p><strong>Revenue/Employee</strong></p> </td> <td> <p><strong>$535,920.00</strong></p> </td> <td> <p><strong>$131,175.00</strong></p> </td> </tr> <tr> <td> <p><strong>Net Income/Employee</strong></p> </td> <td> <p><strong>$52,207.00</strong></p> </td> <td> <p><strong>$17,234.00</strong></p> </td> </tr> </tbody> </table>

CAT is clearly one of the biggest players in the industry judging by revenue/income per employee.

Caterpillar also has the ability to be able to generate above average returns on investments and assets:

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>CAT</strong></p> </td> <td> <p><strong>Industry</strong></p> </td> </tr> <tr> <td> <p><strong>Return on Assets - 5 Yr Avg</strong></p> </td> <td> <p><strong>4.70%</strong></p> </td> <td> <p><strong>3.40%</strong></p> </td> </tr> <tr> <td> <p><strong>Return on Investment - 5 Yr Avg</strong></p> </td> <td> <p><strong>10.10%</strong></p> </td> <td> <p><strong>6.10%</strong></p> </td> </tr> </tbody> </table>


<img src="/media/images/user_14485/cat-vs-sp-500_large.jpg" />

Caterpillar is a great long-term investment with total shareholder return in the top 25% of the S&P 500.

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>CAT</strong></p> </td> <td> <p><strong>Industry</strong></p> </td> </tr> <tr> <td> <p><strong>Dividend 5 Yr Growth Rate</strong></p> </td> <td> <p><strong>7.01%</strong></p> </td> <td> <p><strong>1.2%</strong></p> </td> </tr> <tr> <td> <p><strong>EPS - 5 Yr Growth Rate</strong></p> </td> <td> <p><strong>10.03%</strong></p> </td> <td> <p><strong>9.10%</strong></p> </td> </tr> </tbody> </table>

With a high single-digit dividend growth rate and a 5 year EPS growth rate 1% above the industry average, CAT is still able to produce investor returns – even with the hostile economic environment that we have seen over the past 5 years.

<table> <tbody> <tr> <td><strong> </strong></td> <td><strong>CAT</strong></td> <td><strong>Industry</strong></td> </tr> <tr> <td><strong>P/E Ratio</strong></td> <td> <p><strong>8.4</strong></p> </td> <td><strong>12.90</strong></td> </tr> <tr> <td><strong>PEG</strong></td> <td><strong>0.6</strong></td> <td><strong>N/A</strong></td> </tr> <tr> <td><strong>Price to Cash Flow</strong></td> <td><strong>5.8</strong></td> <td><strong>10.10</strong></td> </tr> <tr> <td><strong>Price to Free Cash Flow</strong></td> <td><strong>37</strong></td> <td><strong>65</strong></td> </tr> </tbody> </table>

The earnings ratios show that CAT is trading at a P/E ratio of about 8.4, less than the industry average of 12.9. The PEG ratio is less than 1, signifying that the share price is cheap, compared to the earnings growth the company is expected to produce. Looking at the earnings and cash flow ratios for CAT we can see that compared to the rest of the industry, CAT is trading at about half of the average.

In summary, right now Caterpillar looks cheap compared to its industry competitors. Caterpillar has been able to produce returns for its shareholders above the industry average, even through the tough economic environment. Caterpillar has pulled through two World Wars, as well as a significant amount of worldwide depressions and recessions – always finding a customer or use for its products. With a product range of over 300 products, from cell phones to freight trains, industrial gas turbines to financial loans. I believe CAT still looks well placed to continue to out-pace its competitors and reward investors in the long term.

Data Source: Motley Fool CAPS

RupertHargreav owns shares of Caterpillar. The Motley Fool owns shares of Cummins. Motley Fool newsletter services recommend 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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