While machinery manufacturers are not often on the minds of most individuals, for investors, perhaps they should be. The heavy duty trucks, construction and farm equipment, provided by these manufacturers are essential for economic development. While the United States economy has not produced the demand and growth to drive growth of heavy machinery companies forward, exposure to emerging markets like Latin America, India, and China has allowed these companies to continue to grow. As construction spending in the US begins to recover, heavy machinery manufacturers should stand to gain from the increased spending.
Deere and Co. (DE)
Deere manufactures agricultural, construction, and consumer equipment; with everything from tractors, to backhoes, to riding mowers, and everything in between. The company sells its products through its branded retail dealer network, as well as through additional major retailers. Shares of DE have underperformed the S&P 500 by 9.5% year to date.
Deere is currently trading at $81.65 per share with a TTM P/E ratio below 11, well below its 5-year average P/E of 15.96 and the industry average of 20. The company has grown EPS by 23.5% over the past 12 months, and expects to continue growing earnings by 12.3% over the next 5 years. The concern with DE centers on the company's debt, with long-term debt/equity of more than 200%.
Deere and Co. pays an annual dividend of $1.84, which equates to an annual yield of 2.22%. DE has raised its dividend for 9 straight years with the most recent increase being 12.2%. With a low payout ratio of 23%, DE should be able to maintain growth near the 5-year dividend growth rate of 16%. While the company does carry significant debt, with the low payout ratio, earnings growth, and low current valuation DE appears to be an undervalued stock offering the potential for capital appreciation and dividend growth.
Caterpillar designs, manufactures, and sells machinery, equipment, and engines to customers around the world through its dealer network. The company is the world's largest provider of construction and mining equipment with annual revenue of $60B+. CAT recently announced lower 2015 guidance, as well as providing guidance that 2012 revenue may come in up to $2B below previous estimates, due to dealers reducing inventory quicker than expected. In the wake of this negative guidance shares have fallen 4.25%.
CAT has underperformed the S&P 500 by 19% year to date, and shares have returned -2.5% this year. Shares of CAT are currently trading at $87.01, giving shares a TTM P/E of 9.7, below the 5-year average of 17.2. Over the past 12 months EPS for the company have grown by 47% on revenue growth of 30%.
CAT has a current dividend yield of $2.08 annually, equating to a yield of 2.4%. Management has already said that even in the event of a downturn the dividend will not be reduced. CAT currently pays out just 20% of earnings in the form of dividends, and has grown its dividend by nearly 8% each of the past 5 years, with the most recent increase being 13%. With a history of 19 consecutive annual increases, CAT will look to continue this streak.
While concerns about a global slowdown can hurt shares of CAT the company has already come out prepared for the worst. By reducing guidance three years in advance, the company has set itself up to beat on earnings and increase guidance in years ahead. The company has committed to paying and increasing the dividend, and patient DGI investors who get involved now may benefit for years to come.
Cummins designs, develops and sells engines and related peripherals like fuel systems, filtration and emissions controls. Cummins is the largest producer of diesel engine technology, and in 2011 had revenue of $18B. For the year, shares of Cummins are up 8%, but since the 16th of September, shares have declined from $102, down to the current trading price of $92.41.
Shares of Cummins trade with a TTM P/E ratio of 9.2, below the company's 5-year average of 16.0. CMI has grown EPS by 31% over the last year and expects to maintain double-digit earnings growth over the next 5 years. Cummins has very low debt with long-term debt to equity of about 10%. The current annual dividend of $2.00, equates to a yield of 2.1% at today's price. CMI has increased its dividend for 7 straight years with a 5-year DGR of just under 32%. With the most recent increase coming in at 25%, and a low payout ratio of 16%, CMI appears to have years of dividend growth ahead of it.
While guidance coming out for machinery stocks may not paint the most positive picture of the near-term potential of these stocks, the long-term growth story is still there. As the economy does begin to recover, and new construction and mining efforts get under way, equipment manufacturers will stand to benefit. With the lowered guidance on top of the already low expectations for global growth, the worst may already be priced into shares of these companies. With any sign of economic expansion and increased spending on equipment, shares of these companies should benefit greatly, and patient investors can collect steady and growing dividends while waiting on the significant capital gains.