Deere & Company (NYSE:DE) recently reported second-quarter net income of $1.1 billion, or $2.76 per share. This measures up favorably to net income of $1.0 billion, or $2.61 per share, for the same period last year. Revenue increased by about 9% to a record $10.9 billion. Robust demand for farm machinery plus several new launched products led to these better-than-estimated results.
Deere & Company (NYSE:DE)’s results are a manifestation of positive conditions in the worldwide farm economy, which continues to display remarkable strength. The company’s performance also provides additional evidence of the proficient execution of Deere & Company (NYSE:DE)’s operating and marketing ideas, which are aimed at broadening its global market presence.
On the other hand, Illinois Tool Works Inc. (NYSE:ITW) reported a 28% drop in first-quarter net income as revenue fell 8%. The company sold its business of “decorative surfaces” and did not include those results in this quarter’s numbers. At the same time, its operating margins improved 60 bps to 16.5%.
Operating margin is basically a measure of how much of the company’s total revenue the company gets to keep. For most of the first-quarter, investors have focused on sales growth as companies have reported, but with Illinois Tool Works Inc. (NYSE:ITW), better operating margins were all it took to lift the stock.
Conclusion and recommendation
Given Caterpillar Inc. (NYSE:CAT)’s attractive valuation with a P/E of about 12.3 times analysts’ consensus EPS estimate of $6.90 for fiscal year 2013 and 10.6 times the consensus number of $8.00 for fiscal year 2014, the stock does look undervalued. In the period, EPS growth in the mid-teens is expected, and analysts are also predicting a four-year compound annual growth pace of at least 14%.
If we incorporate Caterpillar’s dividend yield of 2.4% into that growth to get PEG+Y ratio, we find it even more attractive. The P/E-to-growth pace based on the current- year EPS estimate and a four-year growth outlook, incorporating the 2.4% dividend yield into the equation, would be 0.7; impressive to say the least.
Any addition of Caterpillar Inc. (NYSE:CAT) to your portfolio, however, will require keeping a very close eye on the economic outlook, and reconsideration of shares’ valuation every month or two.
The article Long-Term Growth Makes Caterpillar a Smart Buy originally appeared on Fool.com and is written by Sarah Richard.
Sarah Richard has no position in any stocks mentioned. The Motley Fool recommends Illinois Tool Works Inc. (NYSE:ITW). Sarah is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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