Caterpillar Inc. (CAT) and Cummins Inc. (CMI) are two industrial stocks, with a higher net margin, stronger ROE, and lower Forward P/E as compared with their peers. Both stocks had received positive calls from analysts and will be reviewed fundamentally and technically in this article. Investing strategies will also be presented.
CAT was down 1.51% and closed at $86.94 on March 20, 2013. CAT had been trading in the range of $78.25-$112.00 in the past 52 weeks. CAT has a market cap of $56.95B with a beta of 1.92.
On March 20, 2013, Standpoint Research initiated coverage on CAT with a buy and $105 price target, saying the stock is oversold. Analyst Ronnie Moas said,
I see CAT earning $10.00 / share if we look out to 2014-2015 and I expect to see a $105 price quote here (by 2014-2015). Caterpillar shares are now $27 (24%) off their ($114) high and trading at < 9X my EPS estimate looking out two years. The concerns regarding China and inventory levels are already reflected in the share price.
Analysts currently have a mean target price of $111 and a median target price of $113.00 for CAT, suggesting 27.67%-29.97% upside potential. Analysts, on average, are estimating an EPS of $1.46 with revenue of $13.90B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $8.03 with revenue of $63.69B, which is 3.30% less than 2012. However, analysts are predicting revenue of $69.02B for 2014, which is 8.40% higher than 2013.
On March 20, CAT said that global sales of its heavy equipment fell 13 percent for the three-month rolling period that ended in February, hurt by a steep drop in Asia Pacific demand. Asia Pacific sales dropped 26 percent in the recent period while North American sales fell 12 percent. The only region to post an increase was Latin America, where sales rose 3 percent. CAT's 2013 profit could shrink if the global economy doesn't pick up in the second half of the year as mining companies and builders remained cautious about buying new equipment.
There are a few positive factors for CAT:
- Higher revenue growth (3-year average) of 26.7 (vs. the industry average of 0.9)
- Higher operating margin of 13.0% and net margin of 8.6% (vs. the industry averages of 12.5% and 7.2%)
- Stronger ROE of 37.4 (vs. the average of 24.9)
- Lower P/E of 10.4 (vs. the industry average of 16.7)
- Lower Forward P/E of 8.7 (vs. the S&P 500's average of 13.9)
Technically, the MACD (12, 26, 9) indicator is showing a bearish trend. The momentum indicator, RSI (14), is declining and indicating a strong selling momentum at 31.44. CAT was trading below its 50-day MA of $93.90 and had broken down and closed below its 200-day MA of $87.43 in the last trading day. CAT is bearish in the near-term, as seen from the chart below.
How to Invest
Despite CAT's dominance in the heavy-equipment manufacturing market and its strong fundamentals, CAT's growth could be negatively impacted by the weak economy in the overseas regions in the near-term. However, risk/reward ratio is becoming more attractive after CAT's recent pullback. It is important to see if CAT can move back and hold above its 200-day MA to determine its short-term direction. The author believes it is time to wait for a buying point, instead of selling. Investors can also review the following ETFs to gain exposure to CAT:
- Dow Jones Industrial Average ETF (DIA), 5.42% weighting
- Industrial Select Sector SPDR (XLI), 4.78% weighting
- Dow Jones U.S. Industrial Sector Index Fund (IYJ), 3.17% weighting
Cummins Inc. is a diesel engine manufacturer. CMI was up 1.02% and closed at $116.25 on March 20, 2013. CMI had been trading in the range of $82.20-$126.86 in the past 52 weeks. CMI has a market cap of $22.07B with a beta of 1.97.
On March 20, 2013, William Blair upgraded CMI from market perform to outperform with a price target of $140.00 (from $130.00). On February 25, 2013, Goldman Sachs upgraded CMI from buy to conviction buy with a price target of $144 ahead of an emerging $1+ billion new product cycle. As quoted,
The firm cited: 1) New product cycle to drive over $1 bn sales and $1 EPS upside potential to consensus 2014 estimates - Catalysts: Navistar product announcement, China new standards implementation; 2) Core global truck markets are in the early stages of cyclical recovery and we see 9% upside potential to 2013 consensus estimates - Catalysts: Monthly reports for truck production and freight volumes; 3)Leading global truck and off highway engine market position drives opportunities for further new product sales upside.
Analysts currently have a mean target price of $130.07 and a median target price of $132 for CMI, suggesting 11.89%-13.55% upside potential. Analysts, on average, are estimating an EPS of $1.87 with revenue of $3.99B for the current quarter ending in March, 2013. For 2013, analysts are predicting an EPS of $8.78 with revenue of $17.17B, which is 1% lower than 2012. However, analysts are projecting revenue of $18.79B for 2014, which is 9.50% higher than 2013.
As reported, The "SuperTruck" developed by CMI and Peterbilt Motors Company features a higher-efficiency engine and an aerodynamic tractor-trailer that significantly reduces drag, achieving a 54 percent increase in fuel economy, averaging nearly 10 miles per gallon under real world driving conditions. The potential savings in fuel and greenhouse gases are enormous, with about 2 million registered tractor-trailers on U.S. roads today, according to The American Trucking Association.
There are a few positive factors for CMI:
- Higher revenue growth (3-year average) of 17.1 (vs. the industry average of -0.4)
- Higher net margin of 9.5% (vs. the industry average of 8.8%)
- Stronger ROE of 27.2 (vs. the average of 15.4)
- Lower debt/equity of 0.1 (vs. the industry average of 1.1)
- Lower P/E and P/S of 13.3 and 1.3 (vs. the industry average of 21.1 and 1.5)
- Lower Forward P/E of 11.0 (vs. the S&P 500's average of 13.9)
- CMI generates an operating cash flow of $1.53B with a levered free cash flow of $117.25M
- CMI currently offers an annual dividend yield of 1.72%
Technically, the MACD (12, 26, 9) indicator is showing a bearish trend. RSI (14) is near neutral at 50.01. CMI is currently trading above its 50-day MA of $115.63 and 200-day MA of $100.88. The next resistance is $121.64, the R1 pivot point, followed by $127.41 the R2 pivot point, as seen from the chart below.(click to enlarge)
How to Invest
CMI is expected to capitalize on future emissions standards and remains a long-term buy, supported with its strong fundamentals. In the short-term, it is important to see if CMI can hold above its 50-day MA to determine its near-term direction. For bullish investors, a credit put option spread of June 22, 2013 $105/$110 put can be reviewed.
Note: All prices are quoted from the closing of March 20, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.