Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Caterpillar Inc. (CAT): Value Investing With Blue Chip Stocks

Value investing isn’t all about finding low-priced stocks. In the legendary words of Warren Buffett, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

With that proven strategy in mind, let’s take a look at today’s Dow Jones Industrial Average with an eye for fair or wonderful prices among its 30 proven blue chip businesses. At the very least, using the Dow as our first filter ensures that we’re looking at stocks that once passed the index’s famously strict criteria for inclusion. Then it’s up to the investor to sort the still-healthy wheat in this 30-ticker target list from the fading chaff.

Today, we’ll look at a best-in-class business that trades at a totally backwards discount to its chief competitors.

Why am I so cheap?

Caterpillar Inc. (NYSE:CAT)

Caterpillar Inc. (NYSE:CAT) is the only Dow member from the heavy construction industry. Cat makes the machines that make the world go round, and I think it’s fair to say that nobody does it better.

The company works closer to the infrastructure construction market core than anybody I can think of. The economic headwinds of the last five years have made this a brutally inhospitable sector to focus on, and yet Caterpillar Inc. (NYSE:CAT) keeps pumping out superior returns on invested capital — a highly Foolish measure of real-world profitability.

CAT Return on Invested Capital Chart

CAT Return on Invested Capital data by YCharts.

So Caterpillar Inc. (NYSE:CAT) beats the pants off sector rivals Briggs & Stratton Corporation (NYSE:BGG) and Terex Corporation (NYSE:TEX) in terms of efficient operations. The stock must surely trade at a premium to those inferior performers.


As it turns out, Caterpillar Inc. (NYSE:CAT) shares are orders of magnitude cheaper than Terex Corporation (NYSE:TEX) or Briggs & Stratton Corporation (NYSE:BGG).

CAT PE Ratio TTM Chart

CAT P/E Ratio TTM data by YCharts.

I suppose you could argue that the two much smaller competitors earn their high valuations by dint of being smaller and nimbler than the giant Caterpillar Inc. (NYSE:CAT) operation. But then you’d have to expect them to deliver much higher growth than Caterpillar. That’s not the case, either.

It’s true that Caterpillar’s sales growth just about flatlined year-over-year in the latest reported quarter. But Terex didn’t do much better with a 2.7% sales bump, and Briggs & Stratton’s revenue plunged 13%. Hardly the kind of performance that should earn premium valuations in my book.

I find it hard to argue that Caterpillar’s shares don’t deserve a richer valuation. Trading at just 0.9 times trailing sales and 11 times earnings, this quality stock is too cheap any way you slice it. Placing it next to richly valued rivals only underscores just how unfairly Caterpillar’s shares are priced today.

The article Value Investing With Blue Chip Stocks originally appeared on  and is written by Anders Bylund.

Fool contributor Anders Bylund holds no position in any company mentioned. Check out Anders’ bio and holdings or follow him on Twitter and Google+.The Motley Fool owns shares of Terex.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.