What a difference two years can make. When the Great Recession’s waves and breakers swept over cyclical stocks like steel and machinery a couple of years ago, earth-moving equipment giant Caterpillar (NYSE: CAT) started sinking in quicksand. As former Chairman and CEO Jim Owens said at the time, 2009 was “the worst year in Caterpillar’s history since the Great Depression.”
The numbers bore out his grim assessment: CAT had 2009 sales of $32.4 billion and earned only $1.43 a share – 75% lower than its earnings per share in 2008. The company laid off 19,000 full-time and 18,000 part-time and contract employees; between June 2008 and March 2009, Caterpillar shares fell more than 72% to $20.74.
But CAT stayed focused and disciplined, and as the global economy began to swing back from the brink, the company started to rebound. And Caterpillar stock, which has risen by a whopping 440% since March 2009, CAT stock morphed from earthbound worm into free-flying butterfly.
Here are four reasons to fall in love with Caterpillar stock:
The China Opportunity
Growth in China has cooled off a bit in recent weeks as the government has delayed major public works programs. Tighter credit also has dampened heavy machinery sales. Stiff competition from Japanese heavy-equipment manufacturer Komatsu notwithstanding, CAT has staked a claim in China. And despite the near-term delays, China still plans to build 10 million public housing units in the next couple of years. CAT reportedly plans to spend $1 billion to increase its manufacturing capability in the country and has formed a joint venture with AVIC Liyuan Hydraulics for hydraulic pumps.
Fortescue Metals Deal
Last Tuesday, CAT announced it has inked a deal with Australia-based Fortescue Metals Group to implement an autonomous mining solution to boost performance and productivity in the latter’s Solomon iron ore mine. The two companies will work together to develop a solution that is tailored to the specific business needs of mining companies.
The Rebuilding of Japan
Recovering from the March 11 earthquake, tsunami and nuclear disaster in Japan will require a massive rebuilding effort that could rise above $210 billion. Even though Japanese competitors Hitachi (NYSE: HIT) and Komatsu will be favored sons in the bidding, there’s still a lot of work to go around. Caterpillar construction and heavy earth-moving equipment will be needed to rebuild from the disaster.
Solid Fundamentals
Caterpillar is trading about 85% above its 52-week low of $59.21 last July. With a market cap of $74.94 billion, the company pays a dividend yield of 1.70% and has a price-to-earnings growth ratio of only 0.73, indicating the stock still is undervalued. Quarterly earnings growth is a scorching 425% year-over-year, and analysts’ growth estimates are off the charts: more than 60% for the current quarter, 40% for the next quarter and more than 66% for the full year.
Obviously, there are no “sure things” when it comes to investments. And cyclical stocks are unpredictable and erratic because they are tied to economic cycles that are unpredictable and erratic. CAT benefits from a strengthening economy, so as long as the recovery continues, investors should continue to be well rewarded.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
