Shares of Caterpillar (CAT, Financial), the U.S.-based construction and mining equipment company, look attractive at current levels as they have declined by about 20% over the past 12 months. The current levels should usher in some bullish interest in the share as fundamentals remain strong amidst hope of improvement in overall business climate.
Caterpillar was trading around $82.5, near its 52-week low levels. Caterpillar, with its headquarters at Illinois, U.S., is the world’s largest manufacturer of construction and mining equipment and is also a maker of diesel and natural gas engines and industrial gas turbines. Its competitors include Deere & Company (DE, Financial), Komatsu Ltd (KMTUY, Financial), and ABB Ltd (ABB, Financial).
The headwinds are still there
Caterpillar has a very strong presence in the export market. With much of its revenues coming from overseas sales, a strong dollar does not bode well for the company. The U.S. dollar has been on an upward move touching multi-year highs recently.
Also, the commodity cycle is at the lower side with demand weakening with respect to commodities. The company is going through a challenging phase and that is reflected in its revenue which has been declining in the past two years. Net margin has also been on a downward trend during the same period. Caterpillar is due to announce its 2015 first quarter results on April 23.
Strong fundamentals amid existing challenges
Caterpillar should see a return of investors to its stock as fundamentals remain strong despite many short-term challenges.
Some of the positives that favor Caterpillar are its strong balance sheet, conservative debt structure, leadership position in the market it operates in and an overall rebound in demand caused by external environment.
The company has a strong cash flow position and has been cash flow positive for the last five years.
Its dividend pay-out is a huge attraction compared with its competitors and other companies. It pays a dividend yield of 3.35%, much higher than the average 2% dividend paid out by other companies in an environment marked by low interest rate that is a huge positive point for attracting the investor community. The possibility of a change in the company’s dividend policy appears remote at this juncture, according to analysts tracking the company.
Conclusion
Shares of Caterpillar have been on a downward trend for the past year while the industry in which Caterpillar operates has been facing several challenges leading to erosion in domestic and overseas demand of its heavy equipment and machinery.
But having moved down to $82 levels, Caterpillar's stock does make for an attractive buy at its current share price and should see investors, particularly, conservative investors flocking back to invest in it. The current price level, which is near the lowest price in the last three years, looks attractive for investing in the stock from the long-term perspective as an investor. And with all the positive factors discussed on Caterpillar in the above section, it looks favourably a “buy” at these levels.
