Is Buying Caterpillar Really That Crazy?

Caterpillar’s peers include CNH Global NV (NYSE:CNH), Joy Global Inc. (NYSE:JOY), and Deere & Company (NYSE:DE). The market is cautious on these companies as well, with CNH and Joy having betas more than 2 and each trading at only 9 times trailing earnings. This is so even though earnings were up by about 20% in their most recent quarterly report versus a year earlier. Deere is tied to the agriculture industry and so its multiples tend to be only slightly higher; for example, its forward P/E is 10. It has also been improving on both top and bottom lines. As a result there’s a case to be made that even if Caterpillar is cheap one or more of these peers are cheaper.

We can also compare Caterpillar to Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), which is also seen as a barometer of global economic conditions. Freeport-McMoRan recently dropped in price after it made two acquisitions in oil and gas, which we worry has the potential to weaken management’s focus in addition to possibly being done at too high a premium. Read more about the acquisitions and see which billionaire liked the deal. Its forward P/E is only 8. It’s possible that the market has overreacted, but we still worry about the effects of the company’s acquisitions and so we’d avoid the stock.

We like Caterpillar as a long term investment, and even in the short term we’re not sure that the market should be assuming that conditions will be so poor. We would be interested in taking a look at the company’s peers, however, to see if they are better buys.

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