Per my recent interview with CNBC Asia, Caterpillar (CAT) is a great value stock right now.
Investors should pay little mind to recent short-term trends such as falling EPS, estimates and stock price and focus on the strong long-term fundamentals of this business.
Caterpillar is a global leader in manufacturing construction. As long as the world continues to become more industrialized, there will be plenty of demand for CAT products.
The recent meteoric rise of China from a 3rd world economy to one of the biggest economies in the world demonstrates that the playbook for industrializing one’s country is easy to follow. Consider the examples set by industrialization of all first world countries. Any country wanting to industrialize and raise its standards of living can do so by following the examples of predecessors but without their mistakes. Industrialization today is like plumbing in the past. Pretty much everyone wants and can do it with low risk and far less resources than those that pioneered the process.
As the global leader in the machines and and equipment that are required to build the infrastructure needed to support industrialization, CAT will continue to grow and be profitable for the foreseeable future.
With a top-quintile ROIC, CAT’s management team has demonstrated the ability to allocate capital intelligently and run a sound business. A company does not achieve such high levels of profitability without good management.
CAT’s management responded quickly to the global slowdown by cutting spending and staff. I believe the company will be well positioned to adapt to a faster growth environment when one emerges.
At ~$84.80, the current valuation of CAT implies the company’s profits will permanently decline by 20%.
With a valuation that low, investors should not be surprised that the stock rose nearly 3% on a day when the S&P 500 was up less than 0.5% even though it missed its EPS targets and lowered guidance slightly.
Many stocks are priced for perfection. CAT is priced for gloom and doom that I do not see occurring.
The Dow Jones Industrial Average ETF (DIA) is a good fund for investors seeking exposure to CAT due to its 4.4% allocation and Attractive rating.