By J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter
From Cabot Wealth Advisory 9/22/11 Sign up for free Cabot Wealth Advisory newsletter
Caterpillar (CAT) is the world's largest manufacturer of earth-moving equipment. The company's machines are used in mining, logging and farming, and in the construction, petroleum and transportation industries. Financial results for the second quarter were muted by parts shortages stemming from the disaster in Japan. However, during the remainder of 2011 and well beyond, demand for Caterpillar equipment will be especially strong as a result of the need to replace aging construction equipment.
Demand for additional equipment to rebuild extensive areas of the U.S. affected by recent tornadoes, floods and hurricanes will also increase. In addition, highways, bridges, etc. in the U.S. and other developed countries are in dire need of refurbishing and improvement. Finally, the rapid development of infrastructure in emerging countries such as Brazil, China and India provides a bright outlook for Caterpillar for an extended period of time. CAT shares are undervalued at 13.7 times current EPS. Dividends have been paid since way back in 1914 and currently provide a yield of 2.2%.
Caterpillar (CAT): Low PEG ratio
By J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter
From Cabot Wealth Advisory 7/21/11
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A high-quality company with a low PEG ratio is
Caterpillar (CAT). With a PEG ratio of less than 1.00, it meets my value objective.
My calculation of CAT's PEG ratio of 0.83 is based upon the current stock price of 111.18, my forward 12-month earnings per share estimate of 7.25, and my estimated five-year earnings per share growth rate of 18.5%. Standard & Poor's Quality Ranking for CAT is A+, which indicates the company has produced very steady earnings and dividend performance during the past five to 10 years.
Caterpillar (CAT), founded in 1925, is the world's largest manufacturer of earth-moving equipment. In addition, the company makes diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. Caterpillar equipment is used in mining, logging and farming, and in the construction, petroleum and transportation industries.
On July 8, 2011, Caterpillar completed the purchase of Bucyrus International for $8.8 billion. Bucyrus makes monstrous trucks, excavators, shovels, drills and underground mining equipment used in the mining of coal, iron ore, copper and gold. Bucyrus generates 30% of its sales in North America and 70% from other parts of the world. Sales in 2010 totaled $3.7 billion compared to $42.6 billion for Caterpillar.
Financial results for the second quarter could be muted, as a result of parts shortages stemming from the disaster in Japan. However, during the remainder of 2011 and well beyond, demand for Caterpillar and Bucyrus equipment will be especially strong as a result of the need to replace aging construction and mining equipment.
The necessity for additional equipment to rebuild not only the devastated areas of Japan, but also extensive areas of the U.S. affected by recent tornadoes and floods will increase, too. In addition, roads, highways and bridges in the U.S. and other developed countries are in dire need of refurbishing and improvement, and the rapid development of infrastructure in emerging countries such as Brazil, China and India provides a bright outlook for Caterpillar for an extended period of time. I believe Caterpillar offers excellent short-term and long-term appreciation potential with minimal risk.
Sales will likely increase 13% and earnings per share 18% during the next 12 months led by the recent acquisition of Bucyrus. The dividend was recently increased for the 18th straight year and now provides a 1.7% yield. At 15.1 times my 12-month forward EPS estimate, Caterpillar is undervalued.
Editor's Note: You can read more about PEG Ratio analysis and get continuing coverage of Caterpillar in the Cabot Benjamin Graham Value Letter. There you'll not only find buy and sell advice for Caterpillar, you'll get 20 other excellent value stock recommendations from J. Royden Ward each and every month. Roy applies the strategy of the father of value investing, Benjamin Graham, to find the market's best undervalued stocks. And he will tell you exactly when to sell, too. Roy's recent sell recommendations netted his investors gains of 62%, 39%, 36% and 32% in just six months using the PEG ratio system. Remarkable! Don't miss out on his next recommendations ... click here now to get started today!
J. Royden Ward
Editor of
Cabot Benjamin Graham Value Letter
A lifelong investment professional, J. Royden Ward applies his 40 years of investment research, portfolio management, writing and publishing experience to his role as analyst and editor of
Cabot Benjamin Graham Value Letter, which is directed to long-term investors seeking a guide to profitable value investing based on the time-tested systems originally developed by Benjamin Graham, the Father of Value Investing. A second-generation disciple of Benjamin Graham, Roy in 1969 pioneered the development of a computerized model that applied the formulas developed by Graham using a unique ranking system. Today, Roy applies his system to two models in the
Value Letter.