By Tim Seymour
A chart (see below) of Caterpillar (CAT) shows strong support in the 81.00-82.00 level and weakness from China priced into the stock. Last night on "Fast Money," I debated CAT from the bull case side and argued that this company, which gets more than 60% of its sales from emerging markets, is priced to own. The company has been clear to investors in saying that it is in a "transitional" demand year. This is no surprise. Lower mining sales have been priced into stock and factored into revised guidance by CAT, leaving the stock at very interesting valuation levels.
While global commodity demand is weak and mining projects are being cut back, it's difficult to see the table being pounded. Fair enough. Demand is recoiling, but we are not expecting a return to 2010 or 2006 conditions, for that matter. However, growth isn't dead and the company is seeing pockets of strength in emerging markets. While Latin America and China have slowed, CAT is going to grow 10% in Africa according to its largest African distributor, Barloworld. JPMorgan just reported a third strong month of sales in May, which means a better-than-expected selling season is continuing in China.
Here's more on CAT:
- Management has proven the elephant can dance, meaning it can cut costs and do what it needs to regarding slower demand. CEO Doug Oberhelman is one of the best in the business, and this was a 2009 accomplishment that shows the company will be efficient with its spending and capex. With regard to stock levels, if CAT was banging up against $100 you wouldn't rush in, but at $83 the stock is at an interesting level just above what I think is great support (and put your stop around $80).
- Pre-crisis, when the company was much less profitable, it traded at a 14x multiple. The stock is now at a 12x current earnings and 10x next year's earnings, while trading a P/B of 2.7x well below the 5.5x levels of 2006.
- Today it raised the dividend to record $0.60/quarter, giving investors close to a 3% dividend yield in order to add to the rebounding earnings momentum.