Caterpillar Inc. (NYSE:CAT), the well-known company with the yellow and black logo, operates in the following three lines of business: machinery, engines, and financial products. Caterpillar is poised to do well as the economy continues its global recovery. The machinery business includes a wide array of mining, construction, farming, and forestry equipment. Its engines business produces diesel, heavy fuel and natural gas engines as well as engines in the marine, petroleum, construction, industrial, and agricultural industries. It also manufactures industrial turbines for the oil, gas, and power generation industries. CAT’s financial arm provides financing for its various equipment and insurance for its customers and dealers. This diverse army of equipment is in continued demand throughout the world, as new infrastructure is built in emerging economies and older infrastructures are upgraded in mature economies.
CAT is currently trading at $108 per share, which is off its 52 week high of $116. It looks like a good value with the PEG ratio under one at 0.73, which is lower than the industry average of 0.99. It is also trading at only 5.5 times book value per share. The other compelling story about Caterpillar is that the company is expected to grow earnings at 21.5% per year for the next five years. This growth, combined with its 1.7% dividend yield, should yield stock gains of about 23.2% per year if those estimates are achieved. It is well positioned to double the performance of the S & P 500, which is expected to grow at 10.38% per year over the next five years. I think that CAT is in the sweet spot for earnings growth that will not be difficult for the company to achieve.
What to Expect for July 22 Earnings Report
I would take an educated guess that CAT will beat estimates again for the 2nd quarter of 2011. It has beaten its expected EPS number for 7 out of the last 8 quarters. CAT's management is strong and smart , and I think they're confident that they will beat last quarter's estimate. The current EPS estimate for the 2nd quarter of this year is 1.79, which was an upward revision from the original estimate of 1.63. Keep in mind that CAT reports quarterly earnings on July 22, so there is a little extra risk if you purchase the stock before the announcement. If you don’t like to purchase before earnings, just play it more conservatively and wait until after the report. If Caterpillar does miss on this earnings report, any dip in the stock price would make a good entry point. I think that it is wiser to make Caterpillar a long term buy and hold than to just play it for earnings.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.