Caterpillar Inc. (NYSE:CAT), the world’s largest producer of earthmoving equipment, has done very well over the past few years, doubling its annual revenues since the financial crisis. I was hesitant to recommend it as an investment until recently because I was afraid it was getting too expensive. Since the beginning of February, however, shares have fallen 13.4% and are over 21% below their 52-week high at a time when it seems like most of the market is reaching new highs daily. I believe that it is time to put Caterpillar Inc. (NYSE:CAT) back on the radar, as it is not going to be on sale like this forever.
Caterpillar Inc. (NYSE:CAT)’s recognizable yellow machines are used all over the world, and it is a truly global company with the majority (63%) of its revenues coming from outside of North America. Caterpillar divides its business into five operating segments: Construction Industries, Resource Industries, Power Systems, Financial Products, and Other.
The Construction Industries segment sells machines such as loaders and excavators to the construction and mining industries. This is the segment with the most to gain from the economic recovery, in my opinion, as it will lead to increased spending on infrastructure and other construction projects.
Resource Industries produces machinery for the mining, forestry, paving, and tunneling industries. This is Caterpillar’s largest segment, accounting for 32% of revenues, and was greatly expanded by Caterpillar’s acquisition of Bucyrus in 2011.
Power Systems is Caterpillar Inc. (NYSE:CAT)’s second largest segment, and produces reciprocating engines, turbines, diesel-electric locomotives, and components for all of those applications. The engines produced by the segment are used in the machinery produced by the company’s other segments. Power Systems has undergone significant growth lately, and the company has opened new engine facilities in Brazil, China, and India.
Financial Products in Caterpillar’s in-house financing division, providing equipment financing to both dealers and customers. The segment also includes insurance products for customers and dealers to support purchasing and leasing new equipment. While this segment only contributes a small amount of the company’s revenue (4%), it indirectly contributes much more, as much of the company’s equipment sales would not be possible without the services the segment provides.
While increased infrastructure spending will benefit all heavy equipment and construction-related businesses, Caterpillar should have a particular advantage. Its size allows Caterpillar to benefit from economies of scale and run more efficiently in terms of materials sourcing and manufacturing processes. Caterpillar Inc. (NYSE:CAT)’s dealer network is also incredibly strong and has tremendous reach across the globe, with the majority of the company’s dealers located outside of the U.S.
Aside from being the biggest and the best at what it does, Caterpillar is cheap! Currently trading at just 10.3 times TTM earnings, Caterpillar is projected to have nice growth in the next few years. While earnings are expected to drop slightly in 2013 (a possible reason for the pullback in the share price) to $8.03 per share, the company is projected to increase this to $9.40 and $11.14 in 2014 and 2015, respectively, for an average forward growth rate of 17.8% after 2013. In other words, investors who wait out the “rough” year ahead should be handsomely rewarded. When you consider that shares trade for just 7.7 times 2015’s projected earnings, this sounds very attractive indeed.
We know that Caterpillar Inc. (NYSE:CAT) is the largest heavy equipment company, but are the smaller alternatives cheaper investments? One of the closest competitors is Japanese rival Komatsu Ltd (NASDAQOTH:KMTUY) which has a very similar product makeup to Caterpillar. Komatsu is projected to have a similar earnings drop to Caterpillar this year, but it trades at a much higher valuation of 16 times earnings. In the case of the big, diverse equipment manufacturers, buy American!
One smaller alternative worth looking at, however, is Joy Global Inc. (NYSE:JOY). Although Joy trades at a very cheap-looking 8.2 times earnings, upon further inspection there is a reason for this, and that is because earnings are expected to be stagnant for the next few years. 2012’s earnings of $7.24 per share are expected to drop to $6.21 per share this year, and remain under 2012’s level until at least 2016. Additionally, Joy is not nearly as diversified in its operations as Caterpillar, and only produces mining equipment.
Unless you are exceptionally bullish on the mining industry, Caterpillar looks like the best choice in the sector. Caterpillar has averaged a P/E multiple of around 13 over the past decade, and even more than this during economic upturns. Therefore, conservatively speaking, as long as no extremely negative surprises occur, Caterpillar Inc. (NYSE:CAT) should be a $105 stock again within the year. With the recent pullback, this may just be the optimal entry point for the best heavy equipment maker in the business.
The article The Best In The Business Is On Sale originally appeared on Fool.com and is written by Matthew Frankel.
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