As Housing Recovers, Will Machinery Stocks Outperform? : Caterpillar Inc. (CAT)

The global economy continues its gradual, if painfully slow, recovery from the financial crisis.  In particular, the housing market in the United States looks to be in the beginning stages of a clear recovery after its huge collapse.  The Commerce Department announced that home construction surged over 12% in December to end the best year since 2008.  In light of this, is it time to invest in heavy machinery stocks?

Caterpillar Inc. (NYSE:CAT) is the heavy machinery giant in the United States.  Caterpillar has a market cap of $63 billion, and is trading at a fairly conservative price-to-earnings ratio of less than 10.  Caterpillar confirmed the recovery in construction when it released its third-quarter results.  Revenues through the first nine months of the year climbed more than 16% year over year.  Furthermore, diluted earnings per share surged more than 46%, and Caterpillar increased its dividend almost 9%.

These positive results for Caterpillar were driven primarily by two geographic segments:  North America and China, where sales increased by 9% and 8%, respectively.  Caterpillar’s results help confirm the housing recovery trend in the United States.

Cummins Inc. (NYSE:CMI) is a United-States based machinery company with a market value of roughly $21 billion.  Like Caterpillar, Cummins also pays a dividend, which it increased by 25% in 2012.

Cummins, however, has not performed as well as Caterpillar in 2012.  Sales through the first nine months of the year were down a fraction of a percent.  Meanwhile, operating income declined nearly 7.6% during the first three quarters versus the same period in 2011.

Perhaps most troubling for the company’s third quarter report was that it struggled in the emerging markets.  Cummins reported lower demand for its equipment in Brazil and China, two of the emerging markets expected to be leaders in global growth going forward.  Nevertheless, shares of Cummins experienced a strong rally in 2012.  The company’s stock price surged from $91 to begin 2012 to its current level of higher than $110, a rise of more than 20%.  Investors would be well-advised to wait for full-year results and 2013 demand expectations before jumping in to Cummins shares.