The machinery industry group is composed with many very good companies. I have selected five of the biggest companies for this article. Valuation analytics is fun because there is always a company that is clearly the best and one that is clearly the worst. In this article, my focus is on Caterpillar, Inc. (NYSE:CAT) and Deere & Company (NYSE:DE). The remaining three companies are also well worth the time to study. They are: Terex Corp. (NYSE:TEX), Manitowoc Company (NYSE:MTW) and Joy Global, Inc. (NYSE:JOY).
In my work, I always split my lists into primary and second tier companies. The reason is that most often the second-tier companies produce better valuations and have higher profit potential. When the risk / reward ratio is the same, I naturally recommend the best to my clients.
I have found that most analysts continue to be positive about the machinery industries, forward growth. However, viewing the below charts the price per share, over the past two months, is down severely for all companies. There have been several warnings that have been in a progression for quite some time. For me, these pullbacks could be anticipated knowing the U.S. general markets were caving in and that valuations, two months ago, were not very positive.
You may have noted my sharing, in my recent articles, that there are signals suggesting that overall industry earnings growth is slowing. My longer-term projections confirm this negative trend may continue on for a year or more.
I have found, over the years, that conservative valuation analytics is worth the time spent. They nearly always foretell the near- to short-term direction of a company's share price.
Valuation for Caterpillar, Inc.
Comments: These are not strong Valuations and Target Price Projections. The Valuation Divergence is negative. When I do further fundamental studies, the result neither improves nor declines. Projected earnings growth for CAT indicates that it will be declining through 2015. My technicals are currently graded as, "poor" as are my consensus opinions.
This suggests that CAT will continue to follow the general market indices. (see the below 20-year chart).
Security's valuations should be updated and studied as frequently as possible. This work may or may not offer positive support or perhaps a negative warning! I do not recommend buying CAT due my forecast of a bearish technical cycle.
Plus 10+% / minus 22+% from the current price.
Forward P/E (fye 12/ date):
0.63 - good
Price to Sales:
0.90 - good
Price to Book:
Return on Investment (R.O.I.)
(minus) - 24+% from current the price.
Valuation for Deere & Company
Comments: These are not strong Valuations and Target Price Projections. The Valuation Divergence is negative. When I do further fundamental studies, the result neither improves nor declines. Projected earnings growth for DE indicates that it will be declining through 2015. My technicals are currently graded as, "poor" as are my consensus opinions.
This suggests that DE will continue to follow the general market indices. (see the below 20-year chart).
Security's valuations should be updated and studied as frequently as possible. This work may or may not offer positive support or perhaps a negative warning! I do not recommend buying DE due my forecast of a bearish technical cycle.
Plus 8+% / minus 18+% from the current price.
Forward P/E (fye 12/ date):
0.95 - good
Price to Sales:
0.88 - good
Price to Book:
Return on Investment (R.O.I.)
(minus) - 20+% from current the price.
Source of raw data: Finviz.
Projected Price is calculated and produces a probable range of the current price over the coming one to three months. Fundamental Valuation and Technical Opinion is calculated and translated into a Rating. See the below Report Card. I often suggest cash and patience as an alternative.
Fundamental - weighting (40%)
Technical - weighting (35%)
Consensus Opinion - weighting (25%)
Report Card -Grade: ( 0 - 100 / A - F ) - (ascending / status quo / descending)
71 / C- -- descending
75 / C -- descending
68 / D -- descending
79 / C+ -- descending
76 / C -- descending
My weighted Fundamental, Technical and Consensus Opinion ratings range from Excellent to Very Poor. Grades below 90 / A are not current (never are) candidates for buying. Grades above 60 / F are not current (never are) candidates for short selling. Information and data are ever changing, so be alert. Every company's "Grade" can be from a neutral grade (60 to 90 / D to B) to a buy (greater than 90) or short sale (less than 60) in a very short time.
My methodology for grading all securities is by comparative analytics using my weighted fundamental, technical and consensus opinion date. If you were to go to MSN Scouter, you would find a very similar methodology for their rating any given company. They use several more criteria but give each receives a letter grade of A - F. For example: Apple, Inc. (NASDAQ:AAPL) has for several years received a very high grade fundamentally as well as for their consensus opinion. When the technical weighting falls so does the technical "grade" it will receive. An example of a negative company would be Research in Motion Limited. (RIMM). Here the company has very poor grades in all three of my criterion. The difference between MSN Scouter and my work / analytics is the methodology used to arrive at the appropriate "grade" for a given company. Note: Apple and Research in Motion are used for examples because of the large divergence in both valuations and performance.
Further support for the above notes can be read in my Instablog article on "My Rotation Model."
The machinery industry is and has been very strong since early 2009. However, more recently it has been leading the marketplace down. This fact is applicable, both fundamentally and on the charts. It is technically in sync with its fundamentals and is in stride with its industry. Under normal circumstances this would be a positive remark. However, in the case of machinery, looking at the above tables and the chart below tells us a negative message. That is not unusual and only time will provide clarity as to that old question. The question that is yet unanswered is, do you buy, sell or hold?
My criterion for taking a bullish position is that the company must have the prospect within its fundamental valuation and technical chart to outperform the general market, its sector, and industry group.
I use several indices in my focus to identify the on-going bullish and bearish inflection points. The New York Composite Index is represented well by the ETF, SPDR S&P 500 SPY. The Nasdaq Composite Index is represented well by the ETF, PowerShares QQQ Trust (NASDAQ:QQQ). In my work the identification of bullish and bearish inflection points is of critical importance. Because this is so critical, I also emphasize and use market "breadth" indices. Breadth does not have a tracking ETF; therefore, it was necessary to create my own excel charts.
These two indices, backed up with 'breadth,' is the foundation for my technical analysis. An axiom for the general market says: "the direction (trend) of the general market has a 60% influence on security's profits or losses." The following two charts (long and short-term) include SPY, QQQ and two of the companies presented in this article. I hope you can understand why this analytic exercise is so important to my way of managing assets.
My general market opinion is that the fundamentals are over-valued; the technicals are over-bought, and the consensus opinion is way too bullish. I am currently a bear because my valuations are convincingly negative, and we are in a bearish cycle; it's just that simple!
Further support for my guidance for the general market can be read in my weekly Instablog article "Wednesday - General Market Update & Commentary."
Currently, the above tables and charts present a clear and not-so-positive account of these five companies and the overall market indicators. It is a fact that, the stock market cycles endlessly both fundamentally and technically from bullish to bearish and then back to bullish again. Unfortunately, this is a pattern that is not well-understood or taken advantage of by most investors.
Within this present bearish time frame, there is nothing (longer-term) wrong with these companies. It is simple what happens when they turn bearish, and is just the on-going "cycling effect" of the way the stock market works. I hope you understand and will continue to follow my work / analytics. It won't be long before I can offer you a bullish and up-beat forecast once again.
May I remind you to take a few minutes to study my 10-year charts? When buying or selling, taking a longer-term view of a security's price history is often the difference between profits and losses!
I am bearish on both the world economies and the general market. My more recent Instablog postings are focused on securities that should not be currently held in your portfolio. I suggest that it is vitally important for you to understand that holding cash during questionable time frames in the marketplace is a much wiser choice than holding your present positions. I can assure you that; this is definitely a "questionable" time frame!
Further and on-going support for some of these companies current status will be posted this coming Saturday. My "Saturday Update" can be read weekly in my Instablog article.
Have fun, investing wisely.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.