Is caterpillar worth digging into now – caterpillar inc. (nyse cat) seeking alpha o gastro


Caterpillar Inc. ( CAT) enjoyed a see-saw week, as an ease in tensions regarding the ongoing U.S. China trade dispute saw the stock rise along with Boeing ( BA), John Deere & Co. ( DE), and 3M ( MMM). Indeed, the Dow Jones Industrial Average ( DIA) rose 1.2% on May 21 when news broke that a temporary trade truce had been announced.

After the rise, however, came the fall: both Caterpillar and 3M fell 1% due to weak economic data from Europe. And from this fall, Caterpillar rose again – the stock was up at market close by 0.98% after the Federal Reserve announced it was not inclined to raise interest rates anytime soon. This fall and rise occurred on the same day: May 23.

Amidst all these stock fluctuations, one question stands out: should Caterpillar be bought now? The investment thesis is clear: Caterpillar is globally the biggest manufacturer of construction equipment and mining equipment, and in addition, it also manufactures diesel-electric locomotives, diesel and natural gas engines, and industrial gas turbines. Its global reach can be gleaned from the fact that Caterpillar’s 171 dealers serves 192 countries, and 59% of Caterpillar’s sales and revenue is generated outside the United States.

The vast dealer network, built up over the more than 90 years that Caterpillar has been in operation, is the key competitive advantage that the company possesses. While Caterpillar’s products are renowned for quality and low downtime, it is the availability of the support service on an international level in tandem with a reputation for product quality that gives Caterpillar its edge and has given it pole position among the world’s construction machinery manufacturers in 2017 based on construction equipment sales, outranking Komatsu Ltd. ( OTCPK:KMTUF) ( OTCPK:KMTUY), Hitachi Ltd. ( OTCPK:HTHIF) ( OTCPK:HTHIY), Volvo ( OTCPK:VOLVF) ( OTCPK:VOLVY), the privately-held Liebherr group, the Chinese government-owned XCMG Group, the Doosan Infracore subsidiary of the Doosan Group conglomerate, Sany ( OTCPK:SNYYF) ( OTC:SNYYY), and John Deere & Co.

Indeed, in light of the foregoing, it is no wonder that, as of May 15, 2018, Bill Gates holds 11,260,857 shares of Caterpillar in the Bill & Melinda Gates Foundation Trust stock portfolio. Gates, a close associate of Warren Buffett, is well aware of the value that a dominant blue-chip company can provide an investor with and clearly sees Caterpillar as valuable on this basis.

For any investor wishing to follow Gates’ lead, currently, Caterpillar trades in the mid-$150 range with a price-to-earnings ratio of 20.42, a forward P/E of 13.02 and offers a dividend yield of 2.00% with a low and sustainable payout ratio of 29.1%. The dividend is thus sustainable and has been consecutively raised every year since 1993 – a twenty-four-year record that looks set to become twenty-five this year and make Caterpillar a dividend aristocrat.

Given the recent ebbs and flows that the stock has experienced, the question of fair value inevitably arises. Earnings per share over the past twelve months were $7.65, and EPS growth over the next five years is estimated to be 23.31%. Using an 11% discount rate – the stock market average – I calculate the fair value for Caterpillar to be $279.53. The stock is thus undervalued by 44% at this time.