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When will Caterpillar become a “buy” again?

Today we’ll consider ourselves lucky if support on Caterpillar holds at around $30 a share, and it could very well go lower if earnings keep pushing the broader indexes down. Cat’s in no position to fight the crowds these days and besides, unless you’re a member of the whips-and-chains crowd you probable don’t want to be betting up when the trend’s heading down.

Furthermore, Cat had record sales and earnings for the first three quarters of 2008, which means all the year-over-over year profit/revenue/cash flow comparisons will be terrible in 2009. Cat’s dividend yield will go up as the price goes down, so there may be something to be said for picking up the shares on the cheap, keeping in mind they could get still cheaper.

The short-term story for Cat is all suffering, but if like Cubs fans everywhere you can wait till next year, things might just turn around. Forconstructionpros.com says construction spending outside the United States is about to explode because of infrastructure spending totaling $355 billion.

Chris Sleight, editor of International Construciton magazine says, “The potential boost to the global construction industry from fiscal stimulus packages over the next two years could be enormous. US$ 355 billion is greater than the GDP of many medium-sized countries, and in terms of construction it is greater than the size of the German market – the fourth biggest market in the world.”

He continued, “The key now is for the spending pledges to translate into real on-the-ground activity. Governments need to make sure their planning and tendering processes are as stream-lined as possible and that there are no bureaucratic obstacles in the way of these plans being effective.”

The total additional spending to shore-up economic growth in 20 major economies is set to exceed US$ 1.9 trillion, of which US$ 795 billion has been ear-marked for construction. Most of this will be spent in 2009 and 2010, however schemes such as Brazil’s housing-focused package will be longer term.

Folks living in places like the United States and Western Europe that have all the highways they need can easily forget that places like China, Africa and South America need massive improvements in their transportation grids. The opportunities to build new roads, airports, dams and other projects in the developing world are tremendous.

Demand for machinery will boost demand for commodities needed to build them, plus commodities needed for actual construction. Right now the mining business is in the tank, but all the money being thrown at infrastructure should juice demand for metals, oil and other commodities whose extraction requires equipment Caterpillar builds (along with all its competitors, of course).

The people who were saying Cat looked great at $45 look like idiots now that it’s at $30. Cat’s business tanked in December and doesn’t look to be getting any better in January and probably won’t for the rest of the year. But the prospects for next year — when earnings reports have a chance to show gains again — seem much better.


Disclosure: I own no shares of Cat.

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Tom Mangan posted at 9:55 am January 30th, 2009 |