Economic bellwethers are considered staple stocks when it comes to judging how the overall economy is doing. For the most part, broad-based equipment and diversified products companies generally make the best bellwether. When talking about bellwethers, global equipment maker Caterpillar (NYSE:CAT) is one of the first companies that comes to mind, but is it really the top bellwether? As it turns out, Honeywell (NYSE:HON) might be a better economic bellwether. See why CAT might still be good investment otherwise.
For this analysis, we'll consider the S&P 500 Index as the broader economy. Other major bellwethers we will consider include Deere & Co. (NYSE:DE), General Electric (NYSE:GE), Cummins (NYSE:CMI), Joy Global and Manitowoc. Outlined below is a breakdown of the betas for the major bellwether companies:
These companies have historically been considered economic bellwethers; being able to take a pulse of the general economy and give investors an idea of how other companies might perform. Honeywell has a beta that comes in well below CAT on a number of time horizons. In fact, it turns out that Deere is a much better economic and market bellwether than CAT. Second to Honeywell is its chief rival GE. However, we still prefer Honeywell and CAT as two top bets on a global economic recovery. Billionaire Bill Gates also loves CAT, owning over 10 million shares (check out all the hedge funds loving CAT).
CAT has been beefing up its exposure to China and the mining industry, which will help diversify the company's product lines and operations. Will the move into mining realign the stock with the economy or cause a further dichotomy? We see this as a long run positive for the company, one that may further decouple it from more developed economies, but will help the equipment maker further penetrate higher growth markets. Notable expansion products includes a new mining truck facility in Indonesia and small engine facility in India, as well as expansion of a research and development center in Wuxi, China and expansion of its manufacturing facility in Xuzhou, China.
The organic growth for Honeywell, thanks to new products, has been robust. Much like the case for CAT, China is one heck of a growth opportunity for Honeywell, which includes bolstering demand for aerospace products. See who else owns Honeywell, besides billionaire Ken Griffin (see all the funds here).
Deere is expecting to see revenues gain 5% in 2013 (ending Oct.), but the one thing keeping investors at bay includes the uncertainty related to crop prices and the U.S. drought. Where CAT has a stronghold on earth-moving equipment, Deere owns the farming equipment market.
Cummins expects revenues to be up 8.5% in 2013, after being up only 1% in 2012, thanks in part to pent up demand for truck engine sales. One big benefit for the engine maker is that over 50% of its sales come from outside North America, which should boost growth due to access to emerging markets.
General Electric has one of the best dividend yields among all the bellwethers at 3.5%. The company, much like Honeywell, is a diversified products business and last quarter saw growth in all seven of its segments and total order growth of 2%.
Going long Honeywell and Caterpillar would be two of the best bets in our opinion, both beating out their top competitors. One positive aspect for investors related to investing in CAT versus Deere is CAT's greater exposure to faster growing emerging and international markets. Deere receives around 85% of operating profits from the U.S. and Canada. Meanwhile, CAT receives only around 30% of its revenue from the U.S. The large dependence on the U.S. for profits could also have much to do with Deere's ties to the S&P 500.
As far as valuation stacks up, Honeywell does trade on the high end of the industry and other bellwethers with respect to its price to earning and price to sales multiples:
P/E (on next year earnings
Price to Sales
CAT also trades "richly" when compared to its top competitor, but this is for good reason; both Honeywell and CAT have some of the growth prospects:
Honeywell has a long-term EPS growth rate of 13.7% compared to top competitor GE's 10%, and CAT comes in at 14%, versus Deere's 10%.
The balance sheet that Honeywell carries is also one of the top in the industry, with a debt to capital ratio of 37%, compared to competitor GE's 77%:
Debt to Capital
Overall, we like Honeywell for its bellwether aspects, but also like CAT for its exposure to the urbanization of emerging countries. See which other stocks are carrying the Dow besides Honeywell (read more here).
Disclosure: I am long CAT.