Caterpillar Inc. (CAT) has reached an undervaluation that makes it attractive for the long-term. The stock is not a steady eddy - it fluctuates with large price swings. In the last 52 weeks the stock price ranged from $67 to $116. These price moves of 30% - 40% can be stomach churning for investors.
Investors in Caterpillar need to have a strong stomach and a long-term perspective. I don't really prefer this type of price action in a dividend paying stock, but when looking at the big picture (5 years out or more) investors should do well.
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The stock has fallen since hitting its high of $116 earlier this year. The current price of $84 is about 27% lower than the 52 week high. All of the standard valuation metrics now indicate that the stock is now undervalued. The trailing PE ratio is now 10.67, the forward PE ratio is 7.55, and the PEG ratio is 0.51.
The PEG ratio is forward looking which is based on the company's five year expected annual earnings growth of 17.5%. This strong expected growth dwarfs the actual annual growth that the company achieved in the last five years which was only 7.61%.
Caterpillar's revenue is divided into three primary segments which accounts for 95% of total revenue. Construction industries accounts for 32% of total revenue, Power systems accounts for 31%, and Resource Industries accounts for 30%. The remaining revenue is derived from financial products and other sources.
The company's 2012 revenue is expected to fall in the range of $68 to $72 billion up from 2011 revenue of $60.1 billion. This translates into a 13% - 20% increase over 2011. Profit per share is expected to be $9.50 which reflects the middle range for expected revenue.
The company has identified the following as growth drivers: Population growth, urbanization, and a growing middle class for growth in commodities; Declining ore grades for equipment growth; and Caterpillar brand strength in its breadth of product line, ability to mine in increasingly remote locations, and its ability to support customers to solve complex problems.
According to the Caterpillar Mining Day Event Presentation, base metals demand is expected to double over the next 2 decades. The company will be needed to solve these key challenges in production conditions:
- Increased deep mine production, high risk locations, environmental regulations, capital intensity
- Infrastructure requirements
- Declining ore grades
At the end of fiscal 2011, Caterpillar reported that its order backlog is $29.8 billion. Many of these products have long lead times with some designated for 2014. This bodes well for the company's future growth and success.
Overall, despite the choppiness of Caterpillar's stock price behavior in the short-term, the company looks solid for the future. With a 2.4% dividend and above average expected growth, I would expect the stock to outperform the S&P 500 for at least the next five years. Just keep a bottle of Pepto Bismol handy for the short-term price fluctuations.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
