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The recent news that Caterpillar (CAT) will see a huge impairment charge should be a brief, but opportune buying opportunity. The stock was down over 1.5% on the news. Prior to the announcement, CAT was up 9% year to date, compared to the Dow Jones Index's 4.2%. The news also made me take a better look at how CAT might perform over the interim.

The recent issues surrounding CAT include its purchase of ERA Mining Machinery and its subsidiary Siwei last June for over $650 million. Siwei is known for making equipment to support roofs in mines. CAT found discrepancies between the inventory in Siwei's books and its actual physical inventory. CAT said the fraud was a "Deliberate, multi-year, coordinated accounting misconduct."

The write-down is expected to come in around $580 million. The details include a non-cash goodwill impairment, which should reduce fourth quarter earnings by $0.87 per share, where Wall Street had expected CAT to report $1.70 per share.

The issues with the Siwei acquisition should prove to only be a minor step back for the equipment manufacturer. The future prospects and valuation make CAT a compelling opportunity (see why CAT can take the Dow higher).

Global And Growth Drivers

The basis of the Siwei acquisition was that it was part of CAT's plans to break into the China equipment market. The fraud is not expected to change the equipment company's strategy. CAT CEO Douglas Oberhelman said that he planned to position the equipment company as the leader in China by 2015.

Morgan Stanley expects solid GDP growth for both 2013 and 2014 -- this includes expected global GDP growth of 3.1% (2013) and 4% (2014). Even more important is the expected growth for China. Morgan Stanley expects China to grow GDP by 5.4% in 2012 and then 5.9% in 2013. The stimulus flowing in the Chinese market should help drive the long-term growth for CAT, with major infrastructure spending being a major part of the Chinese spending. CAT also expanded its manufacturing plant in Xuzhou, China, which should boost the production of hydraulic excavators by 80%.

Other key growth drivers includes the replacement of older equipment and urbanization of emerging markets. Not to mention its Bucyrus acquisition for some $7.6 billion that put CAT on the map with respect to mining equipment. This acquisition gave CAT the broadest product offering in the mining industry. The synergies from the Bucyrus acquisition will also help boost CAT's margins. Current operating margin is around 16.4%, versus its five-year average of 13.1%. In addition, the five-year return on investment average is 9.9%, compared to the trailing twelve month ROI of 12.3%.

The rebound in the U.S. construction sector should also help boost the stock. For the third quarter, architecture billings rose again after being down for five consecutive months. Also, both housing starts and building permits were at four-year highs.

CAT also has a solid balance sheet, with cash on hand of $5.7 billion, up from $5.1 billion in mid-2012, and debt to capital comes out att 67%, also an improvement from mid-2012.

Valuation

Given the rebounding economy and strong company prospects, the stock looks to be undervalued.

Let's compare how CAT stacks up to some of the other major infrastructure driven companies, including Deere & Company (DE), Cummins (CMI), General Electric (GE) and Joy Global (JOY):

CAT

Deere

Cummins

GE

Joy Global

Price to Earnings (next year earnings)

11.1

10.2

12.7

11.6

10.4

Price to Sales

0.95

0.99

1.22

1.6

1.29

On a price to earnings basis, CAT trades in line with peers, but well below competitors on a price to sales multiple. Putting the peer average price to sales multiple of 1.28 on CAT's 2013 sales estimates, the market value per share is around $127.12. This suggests upside potential of 30%.

EV To EBITDA

CAT's trading at an EV/EBITDA multiple of 6.2 compared to the industry average of 8.0. Placing the industry average EV/EBITDA multiple on the equipment company's trailing twelve month EBITDA, its adjusted enterprise value is north of $109 billion. This puts the theoretical market value at $135.79 per share -- about a 40% discount to its current share price.

CAT also offers investors a solid 2.1% dividend yield that is only a 19% payout of earnings:

CAT

Deere

Cummins

GE

Joy Global

Dividend Yield

2.1%

2.0%

1.7%

3.4%

1.0%

Dividend Payout

19%

23%

18%

50%

10%

The low valuation and industry leading growth prospects make this global infrastructure giant one of the best opportunities in the industry, and the market in general:

CAT

Deere

Cummins

GE

Joy Global

PEG - Price to Earnings to Growth

0.7

1.2

1.2

1.4

1.5

CAT should be one of the top-performing companies in the interim, thanks to its vast exposure to a rebounding global economy. The modest dividend should also entice investors. If so, you'd be in good company -- mega-billionaire Bill Gates also likes CAT, owning over 10.2 million shares in the third quarter (check out Gates' top picks).

Source: Why Caterpillar Is A Good Investment Now