2 Blue Chip Industrial Plays For 2013

Dec.28.12 | About: Caterpillar Inc. (CAT)

Will they or won't they? With only a few days left until the dreaded "Fiscal Cliff" it's the question on most every American's mind. As an investor, the Fiscal Cliff is making it quite difficult to move at all in this market. The market is whipsawing off of Senate and House of Representatives meetings just as hard as they did during the financial crisis. The risk averse way to navigate this market is to make a shopping list of stocks that are just becoming too cheap. With that in mind, let us take a look at two giants in the industrial space that warrant your attention.

Caterpillar (NYSE:CAT) is quite possibly the best blue chip play in the industrial sector. This year, CAT lowered forward guidance for the next three years. The day Caterpillar did so the stock fell 2%, and has since drawn nearer to the 52-week low of $78.25 than the 52-week high of $116.95. In mid December, however, Caterpillar made a subdued announcement. CAT global sales actually increased by 5% in the three months to the end of November. It seems as though Caterpillar may have lowered guidance too soon.

Lowering guidance could possibly be a move by new CEO Oberhelman to reign in Wall Street expectations. Remember that when Oberhelman first sat in the CEO chair in 2010, he was faced with some lofty expectations. The street expected Oberhelman to boost EPS in 2012 from a $6.08 EPS target to an $8-$10 EPS. That is a 32% raise in EPS expectations on a two-year time horizon. 2012 is drawing to a close, and the average analyst EPS expectation is $9.13 on the year. Simply put, Oberhelman easily met those expectations. In fact, Oberhelman increased EPS by a whopping 50.16% if CAT only meets EPS estimates.

Now, could Caterpillar face serious headwinds with China slowing and a possible nose dive off the Fiscal Cliff looming? Unquestionably yes. Digging a little deeper, perhaps it won't hurt as bad as many assume. Caterpillar stated this year that only 3% of its business relies on China. In theory, a 25% slowdown in Chinese business would only cost the company 0.75% on the bottom line. Does anyone really believe that China will slow to such a serious extent? China still has the world's largest population, is transforming in its their own version of the Industrial Age, and has a countless amount of rural towns that still need necessities like roads, sewers, etc. The Fiscal Cliff could harm Caterpillar though. While the United States will still need CAT machinery to maintain roads and bridges, Caterpillar would lose government contracts as budgets get slashed. Businesses will be forced to cut funding for expansion and growth to compensate for an increased tax burden due to the Fiscal Cliff. There is no question, the Fiscal Cliff is a real potential thorn in Caterpillar's side.

The fundamentals on CAT are strong. Caterpillar has a P/E of 8.98, PEG of .69, P/S of .86, and a forward P/E ratio of 10.08. The CAT story, fundamentals, and the new CEO's proven short-term record far outweigh the potential downside risk of the Fiscal Cliff. I would look very closely at CAT for a 2013 run to $120/share.

Cummins (NYSE:CMI) is another industrial play that looks to potentially increase the value of your portfolio. Recently, CMI announced that they are developing a natural gas version of the 6.7 liter version of the Cummins ISB engine ideal for school buses, medium duty trucks, etc. The 6.7 liter version completes the Cummins natural gas engine line in the sense that now Cummins will offer a natural gas option for nearly every sized vehicle. CMI will offer natural gas engines in 6.7 liter, 8.9, 11.9, and 15 liter sizes when the 6.7 is complete. That is quite an impressive portfolio of future technology CMI will offer.

Cummins has some extremely impressive fundamentals when you dig into the numbers. The company boasts a cash position of $1.27 billion while only holding $747 million in long-term debt. That translates into a .12 Debt-to-Equity ratio. In comparison, SPW has a Debt-to-Equity ratio of .93, only $346.30 million in cash while holding $2.15 billion in long-term debt. Revenue has increased 67% from 2009 through 2011, from $10.80 billion to $18.05 billion. Both of these factors are extremely bullish signs for the stock on their own merit.

Take in to account the more basic fundamentals, and the future for CMI looks pretty bright. CMI has a P/E of 11.05, a PEG of .98, P/S ratio of 1.12, and a Forward P/E of 11.71. Cummins is nearly halfway between the 52-high of $129.51 and 52-week low of $82.20. Take into account the recent upgrade on the stock citing increased demand in the second half of 2013 from Baird, and the stock is looking cheap. A price target of $140/share by the end of 2013 should be looked at as conservative from myself.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CAT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investing involves a significant level of risk. As such, never invest more than you can afford to lose. Also, always consult with a financial professional before adding a new position to your portfolio. I tend to price stocks more aggressively than most to both the up and downside. Price targets should be viewed with that in mind.