Last week we took a look at Deere (DE, Financial); now, let´s focus on one of its major competitors, Caterpillar Inc. (CAT, Financial).
According to revenues, the company 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. The company has a unique brand and a well-known product portfolio that has been building about 100 years. It is one of the largest construction and mining equipment manufacturers as well as an important player with one-fifth of the global new construction equipment market.
Several strategies – like entering in new markets or expanding via acquisitions – have helped Caterpillar reach that prestigious position. Moreover, it has adopted a model in which it has outsourced business with the aim of creating a less dependent company to the economic cycles. In the past, the company was highly leveraged to commodity prices.
For many years the company has focused on emerging markets. More than 10 years ago, Caterpillar acquired SEM, a Chinese competitor, to better meet the needs of customers and support the increasing construction and engineering industry in China.
It is a dominant player in the U.S., and it also operates around the world. Emerging markets, such as China, India, Africa and the Middle East, are regions to further expand operations considering government stimulus spending and industrialization.
Revenues, margins and profitability
Since the same quarter one year prior, revenues increased by 3.2% to $9.8 billion from $9.5 billion. EPS decreased by 30% in the most recent quarter compared to the same quarter a year ago to 32 cents versus 46 cents. Sales and revenue projections are between $38 billion and $41 billion and for the full year, earnings per share of about $2.10 are expected at the midpoint of the range.
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 | 5.75 |
| DE | Deere & Co. | 44.24 |
| KMTUY | Komatsu | 11.00 |
| Â | Industry Mean | 4.76 |
The company has an ROE of 5.75% which is lower than the one exhibit by Komatsu Ltd. (KMTUY, Financial) and the industry mean. In general, analysts consider ROE ratios in the 15% to 20% range as representing appealing levels for investment so for investors looking for a much more attractive ROE, Deere is a more attractive alternative.
Relative valuation
In terms of valuation, the stock sells at a forward price-earnings (P/E) of 28.82x. To use another metric, its price-book (P/B) ratio of 4.73x indicates a discount versus the industry average of 4.74x while the price-sales (P/S) ratio of 1.65x is below the industry average of 1.66x. The P/S ratio is close to a 10-year high of 1.65x.
As we can see in the next chart, the stock price has an interesting upward trend in the five-year period. The EPS are included because it often leads the stock price movement. If you had invested $10,000 five years ago, today you could have $12,700; that is a 4.9% compound annual growth rate (CAGR).
Final comment
As outlined in the article, volatility in commodity prices still constitutes risks for the company. There are some key drivers such as global economic growth – expansion in emerging markets as well as government spending that should benefit the company´s revenues. Furthermore, it is difficult to think that Caterpillar could lose its dominant position. The company has a dividend yield of 2.8% which is appealing to income investors.
Hedge fund gurus like Steven Cohen (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) initiated new positions in Caterpillar in the first trimester of the year with purchases of 505,790, 1,546,900 and 4,500 shares.
Disclosure: Author holds no position in any stocks mentioned.
