卡特彼勒：留得很久

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Caterpillar (CAT) has long been a staple investment for those looking to invest in the industrial sector. The company has been around since 1925 and currently is poised to generate over $60 billion in revenue this year. The company has been benefiting from the boom in construction worldwide. I became a shareholder in the last few months when the shares pulled back below $120. Recently the company reported what many investors were worried about for the last few quarters, a sales decline. However, the shares moved higher as investors realized the outlook isn't that bad. We will know more in the coming quarters but for now we must review when is the best time to add an industrial stock like Caterpillar to the portfolio.

Performance Review

Caterpillar recently reported disappointing earnings.

Source

Revenue saw a slight decline and earnings missed expectations as well. A closer look as to what led to the decline in results, and we see that it had a lot to do with dealer inventories. Last year, in the third quarter the dealers increased inventory by about $800 million. This year they reduced inventory purchases by $400 million. The dealers are taking a wait-and-see approach instead of sitting on costly inventory. This shows you that perhaps everyone has learned from the last recession that it is better to be safe than sorry. Caterpillar's management has responded by reducing production as well. The company was hurt by declines in every segment. Construction industries saw a decline of 7%, resource industries declined 12%, and energy & transportation down a slight 2%. On a positive note, the company continues to maintain its cash position, growing it to a recent $7.9 billion. Debt, on the other hand, is around $24 billion. Some of this debt is due to financial services, about $16 billion of it. These are loans held on the balance sheet for customers who financed equipment.

Source:8K

The company is showing spotty growth in certain regions with rolling 3-month sales figures. Asia/Pacific demand is taking a hit probably due to the trade tiffs. Watching this figure in the future is key, however, to ensure demand doesn't deflate further.

The company did cut its outlook for earnings for the year due to the recent report.

Source:Earnings Presentation

However, it still is generating strong earnings that give the shares a fair value at this time.

The company actually increased its share repurchase program to allow it to buy $10 billion worth of shares last year. No small sum, considering the company only has a $75-billion market cap. In this most recent quarter, the company repurchased $1.2 billion worth of shares. Management stated on the conference call they are not stopping the share repurchases during this rough patch either. This is different than in the past when they would halt repurchases. With a large share repurchase program remaining, there is always a buyer behind the stock ready to pounce on any decline. The company also recently increased its dividend 20% as well which is complementary to its history of raising dividends.

As a dividend growth investor, it is comforting knowing the company is financially sound and on a path to become a dividend aristocrat.

Cyclical Buy

Caterpillar has always been a stock that performs well when the economy performs well. In tough times where new homes being built is not that popular, or when government infrastructure repairs are not able to be funded, the company can suffer from a loss in sales. As we will see below, there can be quite a difference in sales from the top of a cycle to the bottom.

Data byYCharts

During the Great Recession, sales took quite a dip. And recently in 2016, sales were slow due to weakness internationally. However, recently the company has seen great growth again and with it a higher share price. The question is for new investors, when is the best time to buy? For those with a long-term horizon of 10 or more years, the time may be now. The company will surely face another slow-down and maybe it is already here. However, as we can see over time, the shares tend to drift higher. There is another option, and that is holding off for the next recession, waiting for a drop in share price, and starting a position then. This is often hard to do for many, as during recessions it takes the best of stomachs to want to jump in, not knowing if the share price will keep tumbling or rise again. Timing the market, however, can be particularly hard, so buying shares at a fair price based on current earnings projections is often a more well-rounded approach.

Are Shares A Buy Right Now?

We first take a look at historical trading valuations for CAT to decide if it is in line or higher or lower.

Source: Guru Focus

As we can see, the current P/E versus its history is actually low. With an average estimate for earnings of $11.03 for next year, we are looking at shares with a forward P/E of around 12. As we can see from the chart above, many of the industry comparisons are showing Caterpillar is above fair value but versus its own history it is a mixed picture. This of course may be attributed to the changing story of company finances. As the company builds a cash position, reduces debt, increases the dividend, and reduces shares outstanding, the valuation the market deems fair can change.

Data by YCharts

Looking at competitors in the same space, we see that Caterpillar actually trades with the highest yield and lowest forward P/E, making it more attractive than peers. For investors looking for a heavy equipment maker, it is evident Caterpillar is a better buy. If shares were to trade in like with Deere (NYSE:DE), we would see a rise in share price by more than 25%.

Looking at historical yield, we can identify its shares offer an opportunity to collect an above-average dividend.

Source:Yieldchart

In the last 24 years, the company has seen its shares trade with an average yield of 2.56%. Currently, shares offer a yield of almost 3.1%. This has happened only about 20% of the time in the last 24 years. As an income investor this would be appealing, as it means you can now own shares at a time when they yield more than they typically would.

The company, while typically exposed to economic swings, had identified that it has a long runway for growth. With the world population continuing to grow and housing needs constantly in demand, Caterpillar's equipment will always be in need.

Source:Investor Presentation

Additionally, as the projects grow larger and larger, more specialized equipment is needed. Newer machines are able to do more and act more efficiently, requiring construction firms to invest in new purchases from CAT in order to win jobs. Effectively, winning and bidding jobs is how Caterpillar's customers stay in business.Nonetheless, the new equipment has much more technology as well, allowing customers to stay connected and monitor operating performance. The level of measurement in which a customer will be able to do is worth the investment alone.

Conclusion

Caterpillar continues to operate well in this environment and of course is susceptible to any downturn in construction. There is some strength that should help underlying sales in replacement parts and equipment, however. As even when new models are not in the budget, old models need to be maintained. With a growing base of equipment in the field, the recurring revenue stream from parts should continue to grow. Investors looking for a way to play the global infrastructure growth story should look to add shares on any pullback. The company already trades an attractive forward multiple and that is on the basis of average analysts' estimates. If the company can outperform estimates, the shares should see momentum to the upside. In the next downturn, the company can also provide relief to shareholders by continuing to utilize its share repurchase program as well. Alongside support to the stock price, earnings will be given support in the form of less shares outstanding for the income to be divided upon. For growth investors now may be the time, considering any positive news out of the trade talks between China and the United States will probably relieve pressure on the stock. Additionally, as the stock trades below peer valuations, it could rise to higher levels quite quickly. Lastly, income investors with time on their side can collect a healthy safe dividend.

Disclosure:

I am/we are long CAT.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.