Navistar is one of the top ten auto companies loved by hedge funds in 3Q and Icahn appears to be holding his position in this equipment maker rather steady; this could be in part because Navistar is showing more aggressive initiatives to unlock shareholder value. Earlier this fall, the company announced that it was willing to consider aggressive asset sales.
Additionally, we believe that Caterpillar Inc. (NYSE:CAT) is a best-in-industry company and a much better investment than Oshkosh, as far as the construction segment is concerned. Caterpillar is expected to grow revenues 12% in 2012 and 3% in 2013. Caterpillar also pays the highest dividend of the five stocks listed at 2.4%. A better global economy has led to strong growth in Caterpillar’s machinery segment, while future growth will come from the need for heavy equipment to further develop emerging markets. This industry giant is expected to grow long-term earnings at the highest growth rate of our five stocks at 14% annually. Couple its growth rate with its industry-low P/E of 9x and Caterpillar also trades at the lowest PEG of 0.6. Billionaire Bill Gates had Caterpillar as one of his trust’s top picks (see all of Bill Gates’ top picks).
Terex Corporation (NYSE:TEX) is a key competitor in the equipment business and expects to see revenues up 17% in 2012 and then 8% in 2013, with growth driven by its 2011 acquisition of Demag Cranes. Demag added cranes to Terex’s robust product line. Terex has been executing well following a global slowdown that slammed the company, and forced it to post operating losses for 2009 and 2010. Terex trades at the very upper end of the industry at 20x after being up almost 80% year to date. The strong rebound for Terex is expected to continue as various fleets are replaced in the North American market and construction begins to pick up in emerging markets.
Deere & Company (NYSE:DE) is another solid dividend payer – yielding 2.2% – with exposure to the construction markets. Deere should see a similar pickup in sales as Caterpillar, thanks to a rebounding economy. The equipment company expects revenues up 5% in fiscal year 2013, but uncertainty looms given the severe U.S. drought that has pressured many farmers. Deere still manages to trade at a premium P/E to its peers at 11x and could see solid revenue growth in the construction segment despite possible farming declines. Deere saw billionaire Warren Buffett take an almost 4 million-share stake in 3Q (check out Warren Buffett’s top stock picks).
We believe that Oshkosh has limited room for growth given its defense segment overhang and the fact that it appears it is losing the support of billionaire corporate raider Car Icahn. While Icahn begins his exit from Oshkosh, he still owns a large position in competitor Navistar, where he may still be able to pressure management to unlock value for shareholders. For investors looking for a solid dividend and what appears to be one of the top undervalued large-cap stocks, they should have a look at Caterpillar.
