This is not a solicitation to buy or sell this security. Do your own research and come to your own conclusions. I own this.
According to
Finviz.com, there are 14 companies in the farm and construction machinery
sector. With a $49 billion market cap,
Caterpillar is the largest. John Deere
is a distant second with a total valuation of ~$29 billion. Attesting to Cat's dominant position, the third and fourth largest companies are
much smaller at $11.3 and $4.1 billion, respectively. This industry faces a difficult international
environment. Not only is the strong
dollar hurting competitiveness, the commodities super cycle is slowing, which
lowers demand. Domestically, durable
goods orders have slowly decreased since mid-summer. This challenging environment is a primary
reason why most companies in this sector are trading at attractive levels.
Here is the
weekly chart, going back three years
The stock has fallen about 30%, moving from the 109 level in
mid-2014 to its current level in the lower 80s.
There is strong technical support at these levels from several years
ago. The chart may have formed a double
bottom in 1Q14. Finally, the low reading
of the MACD implies a move higher is possible.
Here is a table from
Morningstar of the relevant valuation metrics:
On a PE basis, the company is slightly overvalued relative to
the industry. Supporting this is the
slightly better than average return on assets and equity. However, the company’s growth is less than
the industry average. Although the company
is pretty fairly valued, its dominant industry position warrants a better than
average PE.
Caterpillar’s balance
sheet shows the company is financially well managed. Receivables decreased from 26% of assets in
2010 to 19% in 2014. Although the
receivables turnover ratio has increased from 2.77 in 2010 to 3.25 in 2014, the
size of the increase is statistically meaningless. Inventory increased from 14%/assets in 2010
to 17% in 2012, but returned to 14% over last two years. Since 2010, inventory turnover has slightly increased,
moving from 95.84 to 113.95. However,
these increases in inventory are very small and don’t detract from the
company’s overall attractiveness. The
current ratio is 1.39, indicating the company has ample liquidity. Finally, long term debt is a conservative 32%
of liabilities. With well-managed
receivables and inventory accounts along with a conservative debt structure, Caterpillar’s
balance sheet should appeal to any conservative investor.
The company’s
income statement, however, could be better.
The biggest problem is the two year drop in top line revenue, from $65.9
billion in 2012 to $55.1 billion in 2014.
While the COGS percentage has been stable for the last five years, there
has been a 2% increase in SGA expenses, leading to a 2% drop in the net margin
over the same period. The dividend payout
ratio of 44% firmly supports current dividend levels. Perhaps most importantly, the interest coverage
ratio stands at 12.79, indicating the company’s debt load is anything but a
problem.
And finally, we
turn to the cash slow statement, which dividend investors should cheer. The company has been cash flow positive for
the last five years. With the exception
of 2012, the dividend was funded entirely from operations. The company has the option of ending a stock buyback
program (which totaled $4.2 billion in 2012) to protect future dividend
payments if necessary. And with operations
investments steady between $1.7 and $1.9 billion for the last three years, there
is little reason to think any major change in dividend policy is on the
horizon.
Given the low
interest rate environment, Cat’s 3.35% dividend yield is very attractive. Their financial condition is solid, meaning
there is little reason to see a cut in the near future. The current price level, which is near the
lowest of the last three years, is attractive from a long-term investment
perspective. Adding all these factors
up, Cat is a buy at these levels.
