A CAT Powered Market Move Could Power Portfolio Profits

Posted: Oct 31, 2011 12:20 AM

One of the big movers in an industry that really moves the earth around- the construction industry- reported great earnings last week. The report helped boost sentiment on a stock market that has seen confidence dwindle.

Caterpillar Inc. (CAT, $96.85) is a manufacturer of construction and mining equipment, including engines, turbines and locomotives, and owns related subsidiary companies.

“Caterpillar reported excellent third-quarter results Monday that showed the best quarterly sales in history and an all-time record high backlog.  This is probably the best report we’ve seen out of third-quarter earnings season thus far.” – “Caterpillar’s Record Backlog Bodes Well for Global Economy”, www.SeekingAlpha.com, Oct. 26, 2011

Caterpillar’s sales and earnings growth were interrupted briefly after the 2008 Financial Meltdown, but the growth resumed in 2010.   Consensus estimates on earnings per share (EPS) are projected to grow 63%, 32% and 15% in fiscal years 2011 through 2013.

The company is experiencing booming revenue growth, which is projected to rise 19% in 2012.  ”We see … economic growth (especially in developing nations), ongoing robust construction growth in emerging nations, the need to replace aging and worn out construction equipment in North America and Europe, and strong demand for resource equipment as a result of strong commodity markets.”  –  Standard and Poor’s Research, October 29, 2011

Standard & Poor’s has a “buy” rating on the stock with a 12-month target price of $129.  The S&P credit rating is “A”.  Caterpillar’s 2012 PE is 10.8 based on consensus projected EPS of $8.95.

The stock pays a dividend of $1.84 per share, yielding 1.90%.  The most recent dividend increase was announced in April 2011, and dividends have been paid since 1914.

The stock price completely recovered from the 2008 Financial Meltdown, rose as high as $116 in May 2011, then corrected down to $67 with the early October lows in the stock market.

Now that the stock price is recovering with the market upswing, the near-term trading pattern looks to be about $85 – $95.  A patient investor might be rewarded with a purchase at $85, a dividend of 2.16% and a stock price retracement to $110, giving him a medium-term total return of  30.5%.

Readers should consult their investment and tax advisors to determine suitability, risk and taxation.