Caterpillar - Up 30% With More To Go

John Tobey, CFA profile picture
John Tobey, CFA

For two years following the March 2009 bottom, Caterpillar (NYSE:CAT) led the stock market ever higher. It even gave Apple (AAPL) a run for its money. Then it ran into two downdrafts this year. The first, April-June, was a valuation adjustment in line with the stock market. The second, July-September, was a recession fear buzz saw. For cyclical companies like Caterpillar, recessions are destroyers of profitability and investors’ returns. Adding in previous expectations of high growth and the stock’s dramatic rise made CAT particularly vulnerable. These conditions produced a 35+% drop (meaning a 50+% rise was needed to reclaim its lost ground).

Graph - CAT vs. other performance

(Stock chart courtesy of

Clearly, CAT participated in the October rally, rising over 30%. So, now what? Does that take it back to a more reasonable valuation? Or is there still plenty of room to grow? I believe it’s the latter, and here’s why…

Alcoa and Caterpillar managements confirm no recession ahead

Dwindling recession fears are credited for October’s stock market rise. Importantly, we got real world confirmations from two companies who know the global economy well. Alcoa (AA) led off this earnings report season saying they are seeing growth, not retrenchment (see my article). Caterpillar followed that up with positive data and bright forecasts.

One warning among stock bears has been that analysts remain over-optimistic. However, Caterpillar’s announced a 2011 earnings projection that exceeded analysts’ estimates. The Peoria, Illinois, company is not noted for over-optimism, so it appears analysts are leaning towards caution, not over-estimation.

Here is the latest picture of estimated earnings for CAT.

Graph: CAT earnings estimates

Next year is here, and it offers investors great value

The focus is now on 2012, and Caterpillar’s 30+% growth estimate is very desirable. Even after the recent rise, the 2012 estimated earnings yield is a high 9.8%. Here is how the earnings yields have changed

This article was written by

John Tobey, CFA profile picture
I am the founder and editor of Investment Directions. My career has been managing and consulting to multi-billion dollar funds. Using the widely accepted “multi-manager” approach, I have worked with top investment managers throughout the country, gaining a high level of expertise. My career has spanned many market environments, and I have hands-on experience searching out opportunities and avoiding risks in all of them. I now devote my time to Investment Directions, with the goal of helping investors further their understanding and improve their investing skills. I am currently serving on: The AAUW Investment Advisers Committee and The City of Vista Investment Advisory Committee.

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