Caterpillar (CAT) just came out this week lowering guidance for the next three years. In the statement made, CAT's CEO cited the global economic slowdown, European sovereign debt issues, and lesser demand out of China as the reasons for lowering forward guidance. There doesn't seem to be an immediate end in sight when it comes to the European debt crisis. The market seems to have the same on-again, off-again relationship with the debt situation as teenagers have with their first boyfriend or girlfriend. With European economies contracting, and more austerity sure to come, it could be years before countries like Spain, Greece, Ireland, and Italy begin to bottom.
China is no laughing matter. China is currently growing at less than its ten-year average of 10.59% and has been under that average for the past four years. The market continually attempts to judge whether China will enjoy a "soft-landing" or suffer through a "hard-landing." China just approved $750 billion in infrastructure spending during the third quarter. Leaders in China are doing everything possible to accomplish that "soft-landing," and are beginning to increase infrastructure spending.
The world may be in a clear economic slowdown, but the world's two most powerful economies (China and the United States) are spending on infrastructure. Both countries need to build and maintain railroads, bridges, roads, and maintain cities. Caterpillar is perfectly positioned to capitalize on that construction spending with its highly sought after heavy machinery. A P/E of 9.73, a forward P/E 8.40, a PEG ratio of 0.52, and an EPS of $8.94, the stock looks incredibly cheap in comparison to the S&P averages. Caterpillar is the cream of the crop when it comes to heavy machinery in the construction space. Competitors Deere & Company (DE) and Cummins (CMI) will also benefit from increased infrastructure spending in the two economic superpowers, but Caterpillar's superior service and product will give it the edge over its competitors.
Barring another global recession, Caterpillar's fundamentals show that the stock is cheap and ripe for the picking. A strict comparison between CAT's 0.52 PEG versus Cummins 0.79 and Deere's 0.92 show Caterpillar's growth and price potential. Caterpillar also offers the best dividend versus those competitors with a 2.4% dividend versus DE's 2.3% and CMI's 2.2%.
Caterpillar has enjoyed a refresh of sorts from the recession. The stock fell from lofty heights north of $125 to the current $93 level. Currently, CAT's Fast and Slow Stoch are showing the stock is vastly oversold, and the RSI is trending toward the oversold level as well. While the MACD recently had a bearish crossover, the stock has firm support at the $85 level. That represents only a 7.5% downside risk to the investor.
After CAT lowered its guidance through the end of 2015, the market lowered its expectations on CAT in turn. With lowered expectations, an increase in infrastructure spending, and the strongest fundamentals in the industrial space, Caterpillar looks to be a position everyone should consider adding to their portfolio.
Additional disclosure: Investing involves a certain level of risk. As such, never invest more than you can afford to lose. Also, always consult with your licensed financial advisor before adding a position to your portfolio.