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Caterpillar Rising With The Tide
Posted: Feb 10, 2009 14:48 PM by Gregory S. Davis
The Dow Jones Industrial Average (DJIA) ended the week on February 6 on a high note by elevating more than 200 points or nearly 3%. The surge closed out a week mixed with consternation over the fate of the recently proposed stimulus package and layoff announcements from Macy's (NYSE:M), along with the potential for further cuts from financials like Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS). Let's look at a couple of non-financials on the DJIA that provided energy to the Dow's upward ascent last Friday.
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Company
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Feb. 6 Close Price
|
Change
|
Feb. 6 Volume
|
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Caterpillar
(NYSE:CAT)
|
$33.28
|
+$1.67
(5.28%)
|
17,010,042
|
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Hewlett- Packard
(NYSE:HPQ)
|
$35.85
|
+$1.76
(5.02%)
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23,288,432
|
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International Business Machines
(NYSE:IBM)
|
$96.14
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+$4.23
(4.60%)
|
13,063,843
|
|
Alcoa
(NYSE:AA)
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$8.40
|
+$0.34
(4.22%)
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22,947,209
|
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Walt Disney
(NYSE:DIS)
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$19.45
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+$0.74
(3.96%)
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20,471,220
|
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Data as of market close February 6, 2009
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Earth Mover
One of the strongest upward moves last week was made by earth-moving equipment maker Caterpillar. At the end of January, Caterpillar announced the layoffs of an additional 2,110 production employees, citing declining demand for products made at its Illinois plants. Caterpillar's first three quarters of 2008 were strong enough to push the company to record annual sales and revenues of $51.3 billion, up 14% from the prior year. While Caterpillar did report a stronger Q4 in 2008 with sales up 6% over the prior year, the slowdown in the global economy and sliding commodity prices have cast a dim light on expectations for 2009. Management, however, remains positive and is confident the current down cycle will end.
Valuation
Caterpillar stock is trading down more than 50% over the past 12 months ending February 6. Investors should take note of the company's low price/earnings to growth (PEG) ratio of 1.28 and its complimentary low price-to-sales ratio (PSR) of 0.40. (To learn more about valuations such as these, be sure to check out our Investment Valuation Ratios Tutorial.)
Competition
Caterpillar numbers make it a competitive option to consider against farm equipment manufacturers Deere & Co. (NYSE:DE) and AGCO (NYSE:AG), which boast even stronger valuation numbers. Deere has a PEG of 0.50 and a PSR of 0.60 while AGCO ratios are even lower given its PEG of 0.35 and PSR of 0.30. AGCO reported record Q3 sales of $2.1 billion and a 23% increase in revenues to $6.3 billion for the first nine months of 2008 over the prior year. AGCO full-year results will be reported on February 10. Deere also increased revenues 18% for the year to $28.4 billion, citing strong demand from outside the U.S. Deere's revenues were led in 2008 by a 37% increase in sales of agricultural equipment.
Final Thoughts
The economic slowdown is the reality, but as investors, the idea is to focus on future possibilities. The forward-leaning trends of a growing demand for food, infrastructure development and renewable fuels could lead to strong farm economies and demand for earth-moving equipment favoring the equipment manufacturers mentioned above.
By Gregory S. Davis
Gregory S. Davis is the owner of G. Davis Capital, a Registered Investment Advisor with the state of North Carolina dedicated to providing independent investment research and education. His core methodology for choosing investments includes going against emotion eliciting headlines while focusing on asset diversification. G. Davis Capital also publishes the ETF education website, ETFReady.com . Gregory is a graduate of the Wharton School of Business and he has received an MBA from Bowie State University.
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