Caterpillar Inc. (CAT, Financial) is the world's largest producer of earthmoving equipment, and a big maker of electric power generators and engines used in petroleum markets, and mining equipment.
On June 30, Manning & Napier Advisors, Inc added 15,829 shares for a total of 88,050 shares. At the current market price, the stake is at $7.24 million. The position was initiated in the first quarter of 2010, but after ups and downs, in the last two quarters the fund has been bullish on the stock. So, what's going on at Caterpillar that makes it so attractive for Manning & Napier Advisors?
Stock Price Performance
The stock is trading near its 52-week low of $78.19, and its last closing price $82.27 is down 26.2% from its 52-week high of $111.46. The stock's performance in a year-to-date basis is negative, a worrying 10.75%. Although the stock price has not done very well in 2015, in my opinion, it is a "buy" at this current price level.
International Markets
The firm faces competition in China, so it is possible that revenues from this country will fall in the future. Although the demand is still below its historical peak, Caterpillar won´t lose its dominant position.Â
It also faces greater competition in other international markets, such as Japan-based Komatsu. Both companies hold nearly 50% worldwide market share, they should not enter into a price war.
Other emerging markets such as India, Africa, and the Middle East, are key regions to expand market share, also considering government stimulus spending and industrialization that would lead to further urbanization.
Other Aspects
Looking at the balance sheet, we find that the company has reduced its inventory in the past quarters, while improving free cash flow. The trailing annual dividend yield is 3.40% and is close to 5-year high, so this is attractive for dividend investors.
Revenues, Margins and Profitability
Since the same quarter one year prior, revenues decreased by 4.1%. Regardless of the drop in revenue, EPS increased by 25.7% in the first quarter compared to the same quarter a year ago. The net income increased by 20.5% when compared to the same quarter one year prior, to $1.1 billion from $922 million.
In addition, the gross profit margin is considered high and it has increased from the same quarter the prior year. Also, operating margin is expanding and this is usually a good sign. Further, the net profit margin of 8.75% is above that of the industry median.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| CAT | Caterpillar | 26.37 |
| DE | Deere & Co. | 33.64 |
| OSK | Oshkosh Corp | 13.45 |
| Â | Industry Median | 6.53 |
The company has a current ratio of 26.37% which is higher than the one exhibit by Oshkosh (OSK, Financial) and the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment, so for investors looking for a much more attractive ROE, Deere & Co. (DE, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
| Quarter Ended | Dec12 | Mar-13 | Jun-13 | Sep-13 | Dec13 | Mar-14 | Jun-14 | Sep-14 | Dec14 | Mar-15 |
| ROE (%) | 15.74 | 19.66 | 21.40 | 21.18 | 20.62 | 17.94 | 19.42 | 20.50 | 17.03 | 26.37 |
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 13.19x, trading at a discount compared to an average of 17.3x for the industry. To use another metric, its price-to-book ratio of 2.92x indicates a premium versus the industry average of 1.63x, while the price-to-sales ratio of 0.94x is below the industry average of 0.99x. Two metrics indicate that the stock is relatively undervalued and seems to be an attractive investment relative to its peers, because at that P/E it seems cheaper compared to the industry average. Moreover, the P/E Ratio is close to 2-year low of 12.7, while the P/B Ratio is close to 1-year low of 2.82 and the P/S Ratio is close to 2-year low of 0.9.
If you had invested $10,000 five years ago, today you could have $15,136, that is a 8.6% compound annual growth rate (CAGR).
Final Comment
This industry faces the uncertainty of farming yields and commodities (crop) prices. I think that economic growth, an increase of construction projects or fat government budgets in China for example, will benefit the company.
Disclosure: Omar Venerio holds no position in any stocks mentioned
