Evaluating The DJIA, Part III: Caterpillar And Cisco

Includes: CAT, CSCO
by: Bret Jensen

<< Return to Part II

This is the third installment of a series examining all 30 components of Dow Jones Industrial Average. This segment will cover Caterpillar (NYSE:CAT) and Cisco (NASDAQ:CSCO).

Caterpillar Inc.

“Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. It operates through three lines of businesses: Machinery, Engines, and Financial Products.” (Business Description from Yahoo Finance)


  1. Caterpillar has an A rated balance sheet and pays a 2.1% dividend (one of the highest in the sector).
  2. CAT is one of premier manufacturing companies in the world and is a secular, long-term play on the faster growth of emerging markets. The recent acquisition of Bucyrus should accelerate that growth as well.
  3. CAT has a forward-five-year projected PEG of .7, which is a 50% discount to its five-year average.
  4. Inventory levels at the company remain low, and its dealers’ biggest complaint seems to be they can’t get all the equipment they want. CAT is expected to grow revenues 35% this year and north of 15% next year.
  5. The median analyst price target on CAT is $132. S&P’s price target is $142.


  1. A slowing worldwide economic economy could negatively impact sales of big-ticket items.
  2. Free trade pacts with Colombia, Korea and Panama continue to be held up. Although passage would just help Caterpillar at the margins, it would certainly be helpful to free trade, which CAT thrives on.

Prognosis: I think Caterpillar has a lot of value for long-term investors. However, I think cyclical stocks could be punished further during a summer full of volatility. I think Caterpillar could fall into the low $80s or high $70s before the market stabilizes. I would be a buyer at those levels. I would also consider selling Jan 12 80 puts at $6 to pick up premium or acquire the stock at a lower price.

Cisco Systems

“Cisco Systems, Inc. designs, manufactures, and sells Internet protocol-based networking and other products related to the communications and information technology industry worldwide. It offers routers that interconnect public and private IP networks for mobile, data, voice, and video applications; switching products, which offer connectivity to end users, workstations, IP phones, access points, and servers; application networking services; and home networking products, such as adapters, gateways, modems, and home network management software products.” (Business Description from Yahoo Finance)


  1. Cisco is selling at the very bottom of its five-year valuation range based on P/E, P/S, P/B and P/CF.
  2. The company sports a pristine balance sheet with approximately $5 a share in net cash and a 1.6% dividend yield.
  3. CSCO has beat earnings estimates the last six quarters and sells at just above 9 times this year’s expected earnings.
  4. Cisco has a forward-five-year projected PEG of .9, which is a 25% discount to its five-year average.
  5. At under $16 a share, CSCO is trading under analysts’ price targets. Credit Suisse’s price target is $25 and the mean analyst price target is currently $19.


  1. Increasing competition from the likes of Juniper and Hewlett-Packard.
  2. A CEO that has been entrenched too long.
  3. Cutbacks in federal and state government spending.

Prognosis: Cisco sports a very attractive valuation at these levels. You are basically getting it for $11 a share after stripping out its $5 a share in net cash. Not bad for a company that is still growing revenues and earnings, albeit at moderate pace. It is expected to make $1.70 a share this fiscal year. I would be buyer at this price as I believe Cisco will reward long-term investors.

Disclosure: I am long CSCO.

Additional disclosure: I may also sell puts against CSCO, as stated in article, within 72 hours.