Caterpillar (CAT, Financial), the world’s renowned and largest manufacturer of construction and mining equipment, is one of the few stocks largely preferred by investors who have a strong stomach and a long-term perspective. This is because of the intrinsic value of this type of stock. Though CAT is a dividend-paying stock, it is not a steady stock, as it sometimes fluctuates many times over with large price swings. At one moment, CAT stock can be on the cheap, as it was during the bear-dominated market of 2009, but thereafter, CAT stock almost quintupled.
At another moment, CAT stock reveals a crummy run, as it did for the entire 2011 period when it had a decent gain of more than 20 percent by early May, but soon went down by almost 25 percent at the start of October, only to jump by over 60 percent by February 2012.
Caterpillar, the North American machinery company, recorded a one-year low of $67 and a one-year high of $116 in 2011. CAT maintained a large price swing of between 30% and 40% within this 52-week period. The stock has since fallen from its $116 high, and it is presently trading around $84, which is about 27 percent lower than its previous high.
Is there any possible reason for this extreme volatility? Well, the performance of CAT stock is closely related to the health of the global economy. Therefore, it requires a robust world economy to drive purchases of its equipment. As the direct competitors of Caterpillar in the equipment industries, CNH Global NV (CNH, Financial), Komatsu Ltd. (Other OTC: KMTUY.PK) and Volvo AB (Other OTC: VOLVY.PK) are also prone to the swinging effects of the world economy.
Notwithstanding the high vulnerability of CAT stock to big market declines, this stock has held up very well during the recent stock market crash. Also, CAT has been considered a stable performer over the last 25 years with regard to yielding good returns. On June 13, the board of directors of Caterpillar was reported to have unanimously voted to provide value to shareholders and increase quarterly cash dividend by 13% or 6 cents, which gives an aggregate of 52 cents per share. CAT’s chief executive, Doug Oberhelman, said they did this in an attempt to deliver shareholder return in the top 25 percent of the S&P 500.
On a comparison basis with Deere & Company (DE, Financial) and CNH Global, which are CAT’s closest and direct competitors, Caterpillar is the most renowned brand name; it has the strongest moat and earnings power but it is the cheapest in terms of forward earnings potentials. Though CNH Global offers formidable opposition to Deere and Caterpillar, the company has really struggled to remain profitable. Overall, Caterpillar provides a superior safety profile when compared with Deere and CNH; CAT’s return on assets, return on equity, and its return on investment are valued at 7.1%, 38.3% and 11%, respectively. In addition, Caterpillar has maintained a growth range of about 20% over the past four quarters.
Evaluation and Outlook
According to CAT’s 2011 Year In Review, Caterpillar is a company that derives about 93% of its revenue from three main sources: 32% from its construction industries, 30% from its resource industries and 31% from its power systems. CAT’s financial products and other sources provide the remaining 7% revenue. Analysts have estimated that CAT’s revenue for 2012 will possibly increase by about 13% to 20% over the $60.1 billion actual revenue it made in 2011, and that its forward price to earnings ratio could attain 7.55 from 10.67. Also, CAT’s expected profit per share stands at $9.50, and it has the highest dividend yield of 2.4% when compared to Deere. The company’s financials show that it is solid for the future, besides the opportunity of making decent gains from its stock price in the short term, if we consider the past behavior of the stock price over the years.
At the current price of about $84 per share, CAT is certainly undervalued when evaluated using all known standard valuation parameters. CAT is trading at a discount and analysts have predicted that the stock will outperform.
At another moment, CAT stock reveals a crummy run, as it did for the entire 2011 period when it had a decent gain of more than 20 percent by early May, but soon went down by almost 25 percent at the start of October, only to jump by over 60 percent by February 2012.
Caterpillar, the North American machinery company, recorded a one-year low of $67 and a one-year high of $116 in 2011. CAT maintained a large price swing of between 30% and 40% within this 52-week period. The stock has since fallen from its $116 high, and it is presently trading around $84, which is about 27 percent lower than its previous high.
Is there any possible reason for this extreme volatility? Well, the performance of CAT stock is closely related to the health of the global economy. Therefore, it requires a robust world economy to drive purchases of its equipment. As the direct competitors of Caterpillar in the equipment industries, CNH Global NV (CNH, Financial), Komatsu Ltd. (Other OTC: KMTUY.PK) and Volvo AB (Other OTC: VOLVY.PK) are also prone to the swinging effects of the world economy.
Notwithstanding the high vulnerability of CAT stock to big market declines, this stock has held up very well during the recent stock market crash. Also, CAT has been considered a stable performer over the last 25 years with regard to yielding good returns. On June 13, the board of directors of Caterpillar was reported to have unanimously voted to provide value to shareholders and increase quarterly cash dividend by 13% or 6 cents, which gives an aggregate of 52 cents per share. CAT’s chief executive, Doug Oberhelman, said they did this in an attempt to deliver shareholder return in the top 25 percent of the S&P 500.
On a comparison basis with Deere & Company (DE, Financial) and CNH Global, which are CAT’s closest and direct competitors, Caterpillar is the most renowned brand name; it has the strongest moat and earnings power but it is the cheapest in terms of forward earnings potentials. Though CNH Global offers formidable opposition to Deere and Caterpillar, the company has really struggled to remain profitable. Overall, Caterpillar provides a superior safety profile when compared with Deere and CNH; CAT’s return on assets, return on equity, and its return on investment are valued at 7.1%, 38.3% and 11%, respectively. In addition, Caterpillar has maintained a growth range of about 20% over the past four quarters.
Evaluation and Outlook
According to CAT’s 2011 Year In Review, Caterpillar is a company that derives about 93% of its revenue from three main sources: 32% from its construction industries, 30% from its resource industries and 31% from its power systems. CAT’s financial products and other sources provide the remaining 7% revenue. Analysts have estimated that CAT’s revenue for 2012 will possibly increase by about 13% to 20% over the $60.1 billion actual revenue it made in 2011, and that its forward price to earnings ratio could attain 7.55 from 10.67. Also, CAT’s expected profit per share stands at $9.50, and it has the highest dividend yield of 2.4% when compared to Deere. The company’s financials show that it is solid for the future, besides the opportunity of making decent gains from its stock price in the short term, if we consider the past behavior of the stock price over the years.
At the current price of about $84 per share, CAT is certainly undervalued when evaluated using all known standard valuation parameters. CAT is trading at a discount and analysts have predicted that the stock will outperform.
