Big Sale On 2 Widely Held Names

by: Larry Meyers

There's a big sale going on for two world-class companies. The benefit of tough times in the stock market is that values can be created in individual stocks when a broad market sell-off takes everything down with it. For long-term investors, it might be time to have a look at these bargains.

The first name I'm looking at is the venerable Caterpillar (NYSE:CAT). A lot of people are going to yell and scream at me for suggesting a cyclical, particularly if we hit a double-dip recession. But over the long term, Caterpillar is so financially solid, and has such a great brand name, that its current price of $70 is too good to pass up. The stock is 40% off its 52-week high. Like many of its large-cap brethren, it sits on a massive pile of cash: $10.7 billion. It carries $25.9 billion in debt, but it paid only $177 million in interest on that debt in the first six months of the year. Its TTM FCF is close to $3.5 billion, which gives it plenty of coverage for the billion dollars or so it pays out in dividends. So while fears of a double-dip recession may be real, the company is so strongly positioned financially that there's little to worry about.

The company is projected to earn $6.60 this year, giving it a P/E of 10.5. Meanwhile, competitors like Deere & Company (NYSE:DE) trade at a P/E of 10, but is really struggling in the FCF department, only generating $800 million in comparison. Other competitors like Kubota Corporation, (KUB) also trade at a 10 P/E, but also generate only $600 million in FCF. CNH Global (NYSE:CNH) has the same issue with FCF and trades at a lower P/E, but its operating margins are even worse than Deere's. Even if you discount the 5-year projected earnings growth of Caterpillar from 23% down to 11%, then Caterpillar is fairly valued. So there's upside even from this point. It's a buy.

I'm also going to point to Southwest Airlines (NYSE:LUV). With the recent news that American Airlines' parent AMR Corp. may have to enter bankruptcy re-organization, Southwest's extraordinary business model continues to shine through. Airlines live and die by the economy and by oil prices. What keeps them solvent is cash flow to stave off debt. Look at each company's debt load. AMR has $9.2 billion at a blended interest rate of about 9%. United-Continental Holdings (NYSE:UAL) has $12.5 billion at 6.3%. Delta Air Lines (NYSE:DAL) suffers under $13.1 billion at 7.5%. Southwest has just over $3 billion at 5%.

And would you believe Southwest has $4.37 billion in cash? Yep, it has more cash than debt. That's about $1.20 per share, giving it an effective stock price of $6.15. Folks, the stock's financial crisis low was $5.13. Southwest has more upside potential than downside risk. It's a buy.

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