Caterpillar, Deere Both Undervalued
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the global economy moving towards full employment, greater demand will be placed on construction that accompanies industrial activity. Below, I consider whether or not the stock prices of Caterpillar and Deere have reflected this viewpoint.
Caterpillar (NYSE: CAT) to Receive an Emerging Market Demand
Though the US government is looking to make cuts to its budget, that's no longer a headwind to value for firms like Caterpillar, because it has already been factored into the stock price. What hasn't been factored into the stock price, however, is growth from China. The government recently passed a stimulus package that will give more money away to infrastructure building. Caterpillar should drive greater returns from rising activity in this industry. Some have lamented that Caterpillar will actually be outdone by Chinese competition; but, in my view, the more meaningful picture to grasp is that the size of the market pie is getting bigger.
According to Morningstar, Caterpillar comes equipped with a strong dealer network and economies of scale. By improving end market value chains, the company has been able to appropriately manage its cost base. Now that the company is more vulnerable to commodity volatility following the takeover of mining equipment exposure from Bucyrus, it can gain even higher returns from growing emerging market demand.
Caterpillar's powerful brand image meanwhile protects it from any significant downside. Customers want to deal with the very best in construction, and that's what Caterpillar is known for being. Higher volumes have meanwhile led to greater factory utilization and profitability.
Deere (NYSE: DE) Similarly Undervalued
As the agricultural equivalent of Caterpillar, Deere also has a powerful brand name. Morningstar notes that the company delivered double-digit gains last year despite rising input costs, a poor mix shift, and greater R&D expenditures. In my view, however, these R&D expenditures will pay off when they capitalize off of growing emerging market demand.
Fortunately, Deere has strong penetration potential, since more than three-fifths of business still comes from North America. Brazil, China, and India are becoming increasingly wealthy and with greater wealth comes a desire for higher food quality. This demand increase will be accompanied by rising corn-based ethanol use that helps to boost farm incomes. In turn, this creates positive feedback wherein farmers demand more of Deere's services. I thus recommend buying shares to capitalize off of these positive secular trends.
Interested in Additional Analysis?
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