Caterpillar: Bringing Home the Gold

With the 135th Kentucky Derby on the way, many of us may be wondering how we can make some money on the race.

However I am not a gambler (because I am a numbers person), and I know the odds... Therefore I am betting on something different... GOLD.

With the stimulus package underway and another $1 trillion of borrowed money being added to our debt, gold is sure to sky rocket. Keep in mind that gold trades in US dollars so if our dollar gets stronger it should help prevent it from climbing too fast. Overall, gold should rise with how much money is being printed.

One instrument to look at may be the GLD ETF which mimics the movement of gold bullion, a possible way to make some money if gold sky rockets, like many predict. I like to think outside the box, so I chose a different way to make money off my expected gold spike. I did not do this by playing a gold mining company, but in fact a mining equipment maker...Caterpillar (CAT).

I think CAT is a long term gem, or in this case "goldie". CAT has a decent balance sheet. They reported their first quarterly loss in 16 years; this is a great time to take advantage of their low stock price. Given the economy and that type of business, it is expected. Recessions don't (and this one certainly won't) last forever. The recent GDP number stated exports were higher, with the CAT CEO stating that demand for excavators was at record numbers, thanks to China.

This certainly sends a bullish signal for CAT. CAT has maintained their dividend at 42 cents a share, which at these levels comes to almost 5% a share annually. The chart below (click to enlarge) shows CAT over a year. If you think the market has bottomed, this chart may signal a clear bottom with the market near March 6, 2009.

CAT is a leading equipment maker for the mining industry. Therefore, my theory is: if the price of gold spikes (with the amount of money being printed), gold will become more attractive and profitable to mine; therefore CAT equipment will be in higher demand.

Some analysts have expected gold to hit $1500 an ounce by year end 2009. If this is the case, demand for mining equipment is sure to rise. Check out some of CAT's mining equipment and their mining magazine in print for more details. In the last conference call, CAT announced that they were not looking to cut their dividend but to keep it steady (if not increase it).

CAT was also recently upgraded by JP Morgan, even after a dismal earnings report. Signs on CAT are certainly bullish. CAT was the third best performer in the Dow Jones for the month of April-up over 25%. If you are relatively optimistic and think the market/economy has bottomed, and is bound to move higher in the months to come, you won't want to miss CAT, as it may be off to the races!

Disclosure: Long CAT

Comments

[Uncle Larry:]

Before you jump into CAT, please verify the following statement:
CAT is pulling out of the U.S. Road diesel market because they can not come up with a motor that will meet EPA tier 3 standards. The engine that they have developed for truck and locomotive use has a habit of catching fire.
I am not a CAT shareholder - it is worse - I am a CAT bondholder.

May 03 08:39 AM

[peapack@ver...:]

CAT doesn't have a decent balance sheet. As of the end of 08 they had debt of 77.2% of assets. And their debt is climbing, check quarterly balance sheets before you buy.

Great company, but with problems-see above. Jim Owens is a good manager, but he cannot work miracles.

There are companies with no debt, huge cash positions and better growth prospects out there. Not hard to find them!

May 03 09:10 AM

[yellowhoard:]

Uncle Larry,

I could be wrong, but apparently bond holders positions are the last in line in a bankruptcy.

At least that's this weeks edict.

May 03 09:25 AM

[Spense:]

They laid off 25,000 workers 2 months ago.... how can they possibly bring in good numbers.

May 03 06:15 PM

[Did U Think...:]

"CAT has a decent balance sheet. "

Do you even know what that means?

35 billion in debt.
2 billion in cash.
Forget the book value because deflation makes it a fantasy number.

How is CAT going to roll all that debt over as it comes due? If they are not planning a massive share offering right now for this purpose, the company will likely BK in the next 3 years as depression sucks the life out of residential and commercial construction equipment expenditures.

CAT is hugely leveraged and you also have to consider that they are a shadow bank. The borrowed short (bonds with sub 10 year maturities) and lent long (20+ year loans on construction gear). And those they sold the gear to (is is really a sale if you loaned them the money?) are now going bankrupt. CAT will get stiffed and it will stiff its bondholders.

This will end badly for anyone invested in CAT.

May 03 09:26 PM

[Marco Hickey:]

I need to stop "instablogging" at 3:45 in the morning as I've noticed I make quite a few mistakes. I did not say it was a great balance sheet nor the best balance sheet, and that is the reason for my investment in CAT. I said "decent" as I was comparing apples to apples and didn't state it, so that was my fault. I was comparing CAT with other companies in the heavy machinery field. All of these companies have been hit hard, but they are hanging in there for how bad things are. I believe gold will spike (weak dollar) which will help them with sales of mining equipment as well as exports. China still wants CAT machines... I promise I will try to write my next 3:45 AM blog post a little better/clearer- I'm still new at this...

May 04 12:03 AM

[razzz:]

BUCY or JOYG are a bit more mining specific.

Watch CAT to begin lowering their dividend to survive.

It would be nice if China could pickup the slack in US consumer spending, they are more likely to copy CAT and make templates just as the Japanese did.

May 04 03:53 AM

[Freya:]

CBI is another contender.

May 04 02:47 PM

[Freya:]

China will buy Kubota Machines first, KUB. Favorable currency exchange rate and friendlier Political environment.

CAT is more than likely to be a Key factor in 2010 in the USA.

May 04 05:13 AM