A Heavy Equipment Rebound Is Coming

 |  Includes: CAT, DE, NAV
by: Dana Blankenhorn

Now may be the time to give the equipment sector another look.

Fears of a global slowdown have been hammering the heavy equipment sector lately, with Caterpillar (CAT), Navistar (NAV) and Cummins (CMI) all down over 20% in the last three months.

But operating numbers at these companies aren't half bad. Cummins is still paying a $2/year dividend for a 2.36% yield. Caterpillar's $2.08/year dividend yields 2.6%. John Deere & Co. , which hasn't participated in the slide (yet), carries a $1.84/year dividend, yielding 2.35%.

Of the group, only Navistar is in serious jeopardy. But that might go away quickly if it could just produce a cleaner-burning engine.

A hint that things may be improving, for me, is that the Farnborough Air Show is turning out to be a better market than expected. When airlines can get financing, and buy, new planes, it's an indication to me that other heavy equipment buyers aren't in bad shape. If you have something better, lighter, more efficient to offer, if you can save buyers energy and money with your new equipment, you can make deals.

For investors, present prices in the group are dirt cheap. Cummins' earnings carry a PE of 8.33. Caterpillar is at a PE of 10.10. Deere is the most expensive of the group at a PE of 10.84.

Present prices are based on an expectation of falling earnings going forward as the global economy slows. The question investors should be asking is how much of the slowdown is in the past, and it may well be that most of it is.

That dividend will keep you warm if you're early in the move, and neither CI, CAT nor DE is at serious risk of losing that dividend.

So your down side on taking advantage of these bargains is very limited. The recovery is slowing, not ending.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.