It was announced this week that the U.S. Economy produced 200,000 jobs in December, and economists are expecting 2.5 million new jobs to be created in 2012. Finally, the economy has rounded the corner, and I am comfortable talking about cyclical stocks.
Today, I am going to discuss four big makers of construction equipment. The domestic economy is important, but many of these companies get the bulk of their revenues overseas. Brazil in particular, with its healthy economy, the 2016 Summer Olympics, and 2014 FIFA World Cup Soccer series, will require much infrastructure investment, and many of these companies have established operations in Brazil. Without further ado, four heavy equipment makers:
Caterpillar, Inc. (NYSE:CAT)
Caterpillar is the world's leading producer of earth moving equipment, and has substantial markets in agriculture, road building, mining, and related industries world wide. In fact, two thirds of its sales come from foreign markets.
Caterpillar stock was trading recently at about $96. Its 52 week range is from $116.55 to $67.54, and it has a P/E of 14.6. It has a market capitalization of $61.9 billion, and pays a quarterly dividend of $0.46, for an annual yield of 1.9%. It has raised its dividend each of the past 10 years.
As befits a cyclical company, Caterpillar has come back sharply over the past two years. In the third quarter of 2011, it earned $1.14 billion, or $1.71 per share, more than it earned for the full year 2009. The recent quarter was also a 40% increase from the year earlier per share net. Revenues in the third quarter of 2011 were an all time high, at $15.7 billion, up from $11.1 billion a year earlier. The company expects full year earnings of a record $6.75, and another 10 to 20 percent advance in net in 2012. I highlighted Caterpillar as one company that looked attractive relative to its industrial peers.
The other big 2011 news for Caterpillar was its $8.6 billion dollar purchase of Bucyrus International Inc. (NASDAQ:BUCY), a leader in mining equipment. The combination is expected to achieve over $400 million in cost savings annually by 2015. The deal has left Caterpillar with a high debt load, as at this time debt is nearly 72% of capitalization.
Caterpillar is a bet on the world economy. With its earnings momentum and product portfolio, it is extraordinarily well positioned worldwide to capture infrastructure needs. I endorse adding it to growth and income portfolios.
Cummins, Inc. (NYSE:CMI)
CMI is a world leader in diesel and energy generation technology, and makes equipment for those industries that it sells in 190 countries. 64% of its sales are from outside the United States.
CMI stock was trading recently at about $94. Its 52 week range is from $121.49 to $79.53, and it trades at a P/E of 17.8. It has a market capitalization of almost $18 billion, and pays a quarterly dividend of $0.40 per share, for an annual dividend of 1.7%. CMI has raised its dividend, at times aggressively, each of the past five years.
CMI is also befitting from an infrastructure starved world. In its third quarter of 2011, revenues were $4.63 billion, a 36% increase from the same quarter of 2010. Profits in the third quarter of 2011 were $452 million, or $2.36 per share, which doubled the 2010 quarter.
CMI's business shows no signs of let up. Its long term debt is merely 12% of capital, giving it tremendous flexibility. It has already set an earnings record for 2011, and earnings of $10.00 per share is easy for foresee in 2012. I am comfortable endorsing it for growth and income portfolios.
Deere and Company (NYSE:DE)
Deere is the world's largest maker of agricultural equipment, which it sells globally. Deere also makes construction and forestry equipment, and consumer products such as lawn tractors. 42% of its sales are outside the United States. Deere was trading recently at about $82 per share. Its 52 week range is from $99.80 to $59.92, and its current P/E is 12.4. It has a market capitalization of $33.3 billion, and pays a quarterly dividend of $0.41 per share, for a yield of 2.0%. It has raised the dividend every year since 2004.
Deere's fiscal year ends Oct. 31. In its fiscal 4th quarter, Deere's revenues were up about 14% year over year to $7.72 billion. Profits for the quarter came in at $1.69 per share, an 11% improvement year over year. Increasing food demands in developing countries auger well for Deere, and its Asian and South American sales in particular are expected to continue to progress.
Deere has traded at a P/E discount to the market since 2004. I do not see that changing. Therefore, as much as I like the company and applaud its strong balance sheet (debt is just 35% of capital), I do not see the sort of share price expansion potential that exists in CAT or CMI. I would rather you look more carefully into those companies for capital gains.
Manitowoc Company (NYSE:MTW)
MTW is a hybrid; it manufactures and sells heavy crane equipment worldwide. It also makes commercial grade, kitchen and refrigeration equipment. MTW stock was recently trading at about $10 per share. Its 52 week range is from $23.23 to $5.76, and it pays an annual 8 cent dividend payment, for a yield of 0.8%. It has no current P/E due to losses.
MTW's third quarter continued its relatively slow rebound from 2009 and 2010. For the quarter, revenues were $935 million, up 16% from the year earlier quarter. Profits were 18 cents a share, a six-fold increase from the year earlier. Like the other companies here, it stands to gain from worldwide infrastructure needs.
I cannot endorse MTW for one big reason: Its debt burden is roughly 80% of capital, and the interest on that debt is barely covered by earnings. The company has only $100 million cash on hand, and it has limited flexibility for capital spending, purchases, or investment. The company is leveraged in every way, so that if its growth continues, investors can do well here. Just be warned, it is for risk-tolerant investors only.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.