I have always been a big fan of Caterpillar (CAT). It’s one of the best managed global brands in the world. And if you’re looking for value, it doesn’t really get any better than this. The company has plenty of cash ($3.7 billion of free cash flow in 2007), solid operating margins and a stellar management team. This year marks the 6th straight year of record sales and revenues for CAT, and 2009 does not look too bad, despite a revision on its future earnings.
You want a company that can survive difficult times and benefit from an eventual emerging markets comeback? Caterpillar is part of this exclusive club.
CAT is also a stock that was severely punished by the recent market meltdown. I don’t think it was justified, given the company’s recent performance, robust balance sheet, and long term outlook. Last week, Caterpillar reported third-quarter revenues of $774 million--an increase of $16 million, or 2 percent compared with Q3 2007 (see conference call transcript). This was achieved under a deteriorating business environment in the developed world, but because the company is so well diversified and so well managed, it was able to offset the decline in activity here in the U.S. and Europe.
Fears of a global recession make CAT too risky for some investors who expect a big slowdown in some of CAT’s core markets. I think that they are wrong. Yes, the mining and energy sectors will take a hit, but it won’t be as severe in some regions. China, India and Africa will continue to drive growth. Furthermore, infrastructure projects in the rest of the developing world will continue despite the economic downturn, particularly those being financed by governments in order to to create jobs. You also have to consider that machinery ages and new parts are needed all the time--roads and highways need to be repaired whether the economy is doing well or not.
Furthermore, CAT’s clean diesel and natural gas engines are in high demand around the world, which can offset the drop in truck sales and other heavy equipment. John Kearny of Morningstar recenty wrote that even under the most pessimistic of scenarios, Caterpillar was worth no less than $54 a share. I think that analysis is right.
Disclosure: I own shares of Caterpillar.