Why Caterpillar's Future Is Looking Bright
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Like John Deere (NYSE: DE), the color green, and a leaping stag, Caterpillar (NYSE: CAT) equipment is known at a glance for its bright yellow and its iconic logo of bold letters spelling CAT and a golden pyramid.
Other companies may make yellow construction equipment but it isn’t unusual for the guys on site to still call it a CAT. They are partially right – for many years early on, CAT was synonymous with Caterpillar. They were names that described machines as dependable as the company that made them. Then, in the 1950s, Caterpillar decided to expand its brand offering and CAT began to emerge as a brand in its own right. It has been more than 60 years since then. Today, Caterpillar is home to roughly two dozen brands, including Anchor Coupling, Olympian and its own financing company, while the CAT brand has expanded to offer everything from harvesters and forest machines to backhoes and asphalt pavers.
Caterpillar has been exploding since last fall. Right now, it is up over 21% year-to-date and is one of the best performing stocks in the Dow, but I still think there is room for this “CAT” to run. It has tremendous exposure to emerging markets, especially with regard to mining. Think China, India. These are places that Caterpillar is really going to excel in because it positioned itself to be there at the right time. Add to that its 2011 $8.8 billion cash acquisition of ming equipment company Bucyrus and Caterpillar is going to be the company to beat in these markets – and those advantages probably haven’t even been priced into the stock yet.
Plus, keep in mind that Caterpillar is an extremely strategic company. For instance, within a couple months after it bought Bucyrus, the company announced that the Industrial Division of Sime Darby Berhad (SIME) would acquire a portion of Bucyrus’ distribution business, which had been included in the acquisition. The transaction was valued at $360 million. Then, a month later, Caterpillar announced that it was selling the rest of the Bucyrus’ distribution business to Finning for $465 million. All in all, this means that Caterpillar was able to acquire Bucyrus’ mining equipment, patents and factories for less than $8 billion and it was able to divest the distribution business, which really would not have meshed with Caterpillar’s strategic plan anyway – so it saved itself the costs of having a business that didn’t match with its core competencies, which I think is just further proof of how good Caterpillar’s management really is. For more proof, just look to its recent performance.
Caterpillar grew its revenue 41% last year, 36% past two years. I don’t see it slowing down. In addition to the growth coming from emerging markets, there is also the growing need for Caterpillar’s product as the US economy rebounds – this is going to drive Caterpillar’s growth even further.
Right now, according to Yahoo Finance, analysts are estimating that Caterpillar’s earnings will grow by an average 26.50% a year, over the next five years, compared to estimates of just 17.73% for its industry. Yet, even with all this, the company is still priced at just 9.94 times its forward earnings. Given that analysts predict earnings growth of 28.50% this year and 19.00% next year, Caterpillar has an intrinsic value of $112.48. It recently traded at $112.49 a share, so it is fairly priced for analyst estimates over its earnings growth.
Analysts give this company a mean one-year target estimate of $131.61, but, again, there are factors in Caterpillar’s outlook that have not made their way into the forecasts yet. In other words, the company has an expected upside of roughly 17%, not counting its more recent prospects – imagine if they were added. In addition, Caterpillar also pays a $1.84 dividend (1.60% yield), which it has increased consistently since 1992. The company even increased its dividend twice during the financial crisis, once in 2007 and once in 2008, boosting its yearly payout by 24 cents each time. Given that its payout is just 24%, it is fair to assume that Caterpillar is well-positioned to continue offering its dividends.
Caterpillar’s outlook is even stronger when considering some of its competitors. Take Netherlands-based CNH Global (NYSE: CNH) for instance. CNH Global, like Caterpillar, has its hands in agricultural equipment, construction equipment and financing services. And, also like Caterpillar, CNH Global has several brands in its portfolio, including Case IH and New Holland. The company is also currently expanding into emerging markets, like Caterpillar, except in its case it is attempting to increase its hold by offering new tractors and the like that are geared specifically toward the needs of those markets. But, for as good a company as CNH Global is, it still isn’t Caterpillar.
CNH Global grew its net sales 27% over last year, but its net income fell 13% over last year. That said, the company still has strong predicted upside. It recently traded for $42.89 a share on a mean one-year target estimate of $51 a share. It does not offer a dividend but it is priced low, even lower than Caterpillar, with a forward P/E of 9.18 – expectations for its growth however leave room for improvement.
According to Yahoo Finance, analysts expect that CNH Global’s earnings will grow by an average of 13% per annum over the next five years. They predict that the company’s earnings will go up 10.20% this year and 10.90% next year. This means that CNH Global has an intrinsic value around $43.87, suggesting the stock is modestly underpriced by roughly 2.3% – hardly enough to make it worth it considering that the CNH Global does not offer a dividend.
At this rate, even leaving some of Caterpillar’s outlook to the side for a minute, CNH Global doesn’t even touch the company’s upside. My recommendation is to buy into Caterpillar before its price adjusts to reflect its outlook.
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