By Renee O'Farrell
Caterpillar (CAT) is a market leader, but more than that - it is an icon. Brand recognition of the famous Caterpillar logo ranks right up there with celebrity brands like Pepsi (PEP) and Google (GOOG), and, like its famous brethren, its performance does not disappoint. The company, which reported its first quarter earnings on April 25, fell short of analyst estimates about its revenue, reporting $15.98 billion compared to expectations of $16.22 billion, but made up for it in earnings. Caterpillar reported an earnings per share of $2.37 versus estimates of $2.12 a share.
This seems to be a trend with the company as of late. In 2010, Caterpillar reported an earnings per share of $4.15, beating out the consensus estimate of $3.92. In 2011, the company surpassed analyst expectations even more soundly, reporting an earnings per share of $7.40 over estimates of $6.81. Expectations are even higher for the company going forward. Analysts estimate, on average, that the company will bring in $9.54 a share this year and $11.36 a share next year. At its current trade price of $103 a share, Caterpillar is priced very low, at just 9 times its forward earnings compared to its peers' average of 12.84. Caterpillar also pays a $1.84 dividend (1.70% yield)
There are several factors contributing to Caterpillar's massive success. In 2011, the company acquired mining equipment company Bucyrus in a $8.8 billion cash deal. A few months after that, Caterpillar sold a portion of the company's distribution business to Sime Darby Berhad (SIME) for $360 million. Shortly after that, Caterpillar sold the rest of the Bucyrus' distribution business to Finning for $465 million. It was a brilliant strategic move. The acquisition provided Caterpillar with a variety of cost saving synergies while divesting Bucyrus' distribution business allowed it to get rid of non-core operations and lower the realized cost of the acquisition. More recently, Caterpillar scored a victory after the Ministry of Commerce of the People's Republic of China [MOFCOM)] formally approved its acquisition of ERA Mining Machinery. The deal will improve Caterpillar's foothold in mainland China.
But, I think it is more than that. Caterpillar has been around for decades and it is still growing. The company has its strategy, and by extension, its management to thank for that. Ken Fisher's Fisher Asset Management, Ralph V. Whitworth's Relational Investors and Donald Chiboucis' Columbus Circle Investors each held significant positions in Caterpillar at the end of fourth quarter 2011.
Very few companies operate at the level Caterpillar does. Deere & Co (DE) is one of the closer ones. It is roughly half the size of Caterpillar - Deere's market cap is just $32.73 billion versus Caterpillar's $66.95 billion - but the two companies share similar risks and access similar markets. Deere recently traded at $81 a share. The company earned $6.63 a share last year, beating consensus estimates of $6.44 a share. Going forward, analysts expect Deere's earnings to come in at $8.02 this year and $8.51 a share next year. This means that Deere is currently priced at 9.52 times its forward earnings.
Deere has been reinvesting a lot lately. It recently spent $70 million plan to expand large tractor production at its factory in Waterloo, Iowa. The improvements are expected to increase capacity over 10%. Deere is spending almost half that to expand its production capacity in Orenburg, Russia by moving to a larger facility. The move is expected to increase capacity by 600 percent. Deere is building eight new factories, including one in India. The company also has strategic agreements in place with MacDon Industries and Topcon Positioning Systems. Yet, its sales have been declining nonetheless. I like Deere as a company, but I don't think that now is the right time to buy unless you don't mind a little speculation.
Kubota (KUB) is a $12.17 billion market cap company based in Japan that also competes to an extent with Deere and Caterpillar. Kubota recently traded at $48 a share. Last year, the company earned $2.52 a share, falling marginally short of the consensus estimate of $2.60. This year, analysts are expecting Kubota's earnings to come in around $3.15 a share, rising to $3.38 a share next year. At these rates, the company's forward price to earnings ratio is around 14.20, making it significantly higher than its peers, and really the growth doesn't warrant the pricing premium. Kubota does pay a dividend of 79 cents (1.70%) but that is fairly lower than its peers.
Late in the fourth quarter 2011, Kubota announced that it would acquire almost 80% of Kverneland Group, a farming equipment maker based in Norway, for $220 million. The deal will surely add to Kubota's earnings, but I think it is priced too high right now to be worth the risk of investment, especially when stocks like Caterpillar are positioned so favorably.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
