While most stocks have been rocketing ahead through 2019, Caterpillar (NYSE:CAT) has been close to moribund, up only 6.4%. This struggle in Caterpillar stock continues despite a decent first quarter and a 20% hike in the dividend, which took its yield up, over 3%.
Caterpillar announced earnings April 25, reporting net income of $1.88 billion, $3.25 per share fully diluted, on revenues of $13.5 billion. Sales were up just 4.6%, but profits were up 18%, from a year earlier.
On May 2, the board doubled-down on the good news, hiking the dividend to $1.03 per share from 86 cents, and raising guidance on full-year earnings about 30 cents, from $11.75-$12.75 per share to $12.06-$13.06.
Is That All There Is?
Investors seemed to be singing the old 1960s song “Is That All There Is.” Analysts are now more neutral than they were three months ago, when Caterpillar earnings disappointed and shares plunged about 4%.
It was analysts who were making excuses this time. Caterpillar is losing market share in China, said one. Look it’s losing sales in Latin America said another. Its Trump’s tariffs, which could cost $250-$350 million unless a trade deal is reached, moaned a third.
A recent Deutsche Bank downgrade is typical. Caterpillar is a bet on synchronized global growth, its backlog of orders is declining, and half of the company’s revenue comes from outside the U.S. The bank’s price target on Caterpillar stock is $128, lower than its May 6 price of $136.
Regardless of the reason, analysts have created a short-term bargain for income investors. Caterpillar opens for trade May 6 at less than 13 times earnings, it has a 3% dividend that’s backed by earnings and the promise of more hikes ahead. This should be music to an income investor’s ears.
The Internet of Cat Things
The most interesting story to come out on Caterpillar may be its growing services revenue.
Caterpillar is putting sensors on its new equipment, which transmit to a cloud-based analysis system that in turn can warn the equipment owner when preventive maintenance is required. Just as with people, fixing something before it breaks costs less than fixing something afterward. The “services revenue,” in this case, comes in the form of spare parts sales. This is technology formerly called the “Internet of Things.”
Whether it’s called “cloud revenue” or spare parts, the services business represents about one-third of the company’s revenue, which is split between Caterpillar and its dealers.
Out of Fashion
The best reason for Caterpillar stock to be down, relative to the market, is that it’s unfashionable.
When all stocks are rising, the incremental gains on income stocks aren’t as attractive as the fat gains on speculative issues. That’s what people are chasing right now.
The company hosted an “analyst day” on May 2, selling itself from its new base in suburban Chicago, to which it moved from Peoria a few years ago. These events usually create a short-term pop in a stock, but in this case, the reaction was negative, the shares losing almost $3 per share on May 2.
The Bottom Line on Caterpillar Stock
The best time to buy a stock is when people hate it, not when people love it.
Caterpillar is a slow-growth company you buy for income, not capital gains. While shares have more than doubled from where they were at the start of 2016, they’re nearly 20% below their early 2018 peak. They will rise and fall, but if the dividend stays strong, you are in good shape.
Now may be the best time for a conservative investor to strike.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.