Caterpillar Inc. (NYSE:CAT) is currently the fifth-cheapest stock on the Dow, trading at just 10 times earnings, well below it’s historical average of 16. The stock is cheap mainly because it is a highly cyclical company that is vulnerable to the health of the global economy.
That may not be a great thing nowadays, but this creates opportunity for long-term investors The company faces some near-term headwinds in its resources industries segment, but still remains positioned well in the segment long-term, especially after its purchase of mining equipment maker Bucyrus. The continuing housing rebound in the U.S. should bode well for Caterpillar Inc. (NYSE:CAT) in the future.
For even more in-depth coverage on Caterpillar Inc. (NYSE:CAT), one of our top analysts has put together an extensive report detailing everything an investor needs to know when debating whether or not to buy the stock. Just click here to access it now.
Andrew: Hi Fools, Andrew Tonner here. I’m joined today by our Fool.com Analyst, Brendan Byrnes.
Brendan, you look at these things all the time — broad indexes — breaking down the Dow, what do you think is the best value play when you look at the 30 components of the Dow Jones index?
Brendan: I ran a screen on Capital IQ and I looked at some of the Dow components. Right now, Caterpillar Inc. (NYSE:CAT) is trading as the fifth cheapest stock on a price-to-earnings basis right now, at about 10X earnings. I think, for a long-term investor, it’s a really attractive stock. Not the best fourth quarter overall; there are some near-term headwinds that I think are keeping this stock cheap.
Number one, commodity prices are down, especially when you look at China and Australia, which obviously hurts mining. The big mining manufacturers aren’t going to come in and make big equipment purchases with the cost of commodities where they are right now, but that does create more of an opportunity, I think, to buy this stock at 10 times earnings.
When you look at longer-term tailwinds, construction in the U.S., especially related to housing coming back, which should help Caterpillar Inc. (NYSE:CAT) quite a bit.