Caterpillar’s infrastructure prospects
Standard & Poors rates Caterpillar a strong buy because of its potential to sell a lot of tractors as governments around the globe build bridges, roads and such to juice their economies.
The TV talking heads have been flogging Caterpillar’s prospects since early December, when Barack Obama promised a massive infrastructure spending plan. Those who had the nerve to buy Cat at its October and November bottoms have notched 40 percent gains, including a stunning 11 percent pop on Dec. 8, the Monday after Obama announced his plan. Interestingly, all the hype since Dec. 9 has added a mere 7 percent to Cat’s price (42 and change then to 45 and change today).
The S&P report at BusinessWeek.com is the first in-depth, seemingly authoritative (packaged subprime mortgages, anyone?) report on Cat I’ve seen since starting this blog. Among the telling tidbits:
We expect Caterpillar to be a major beneficiary of the global infrastructure boom we see, with an estimated 6.4¢ of every dollar spent on highway construction used toward the purchase or lease of equipment or on major repair and maintenance, according to a recent report from Associated Equipment Distributors, an industry organization. In regard to water infrastructure, 12¢ of every dollar spent on sewer and drinking water projects is for construction equipment, according to Associated Equipment Distributors.
In the U.S., we believe Caterpillar is extremely well positioned in its chosen infrastructure equipment end markets. The company derived $17 billion (38%) of its 2007 revenues in the U.S. The National Governors Assn. estimated there are more than $136 billion of infrastructure projects ready to break ground.
Mind you that 6.4/12 percent will be divided among Cat and all its competitors, but as the No. 1 company in the sector, Cat should draw the lion’s share. Cat’s financial arm looks strong, too:
We believe Caterpillar Financial’s ability to access nearly frozen credit markets was evident in September 2008 at the height of the credit crunch, when it easily raised more than $1.3 billion in funding, allowing it to continue to provide funding options to its customers.
You need to read the whole thing to get to the part where it warns of substantial risk from reversals in the markets and national economies. But that’s true of all stocks. I can say from my own experience that Caterpillar has traded between the 30s and 60s as long as I can remember, so from a long-haul perspective a price in the mid-40s with a 4 percent dividend yield seems reasonable (though if you base your buys on blogger recommendations, you get what you pay for).
MarketWatch on infrastructure ETFs
John Spence at MarketWatch profiles a batch of exchange-traded funds that stand to gain from infrastructure spending. EFTs protect you from individual-stock risk, but you really need to know where the money in these funds is invested:
Choosing an infrastructure ETF presents its own challenges, though. For one, McCall and others say some infrastructure funds are too heavily invested in utility stocks, which many analysts believe aren’t poised to gain as much from infrastructure spending as other sectors, like construction and engineering.
He points to the PowerShares Dynamic Building & Construction Portfolio, which invests only in U.S. stocks and has just under 5 percent invested in Cat, for instance.
Motley Fool on jumping into China
Tim Hanson at Motley Fool notes that the collapse of China’s stock market bubble in the last year has not crushed the prospects of investing there. China’s government also has a massive infrastructure plan in the works.
So, while the China market is coming to terms with reality, there are individual companies that will continue to profit from this enormous economic growth engine. Remember: No matter what its relatively immature domestic stock market says, the opportunities in China are huge. If they weren’t, companies such as Yum! Brands, Caterpillar (NYSE: CAT), and many others wouldn’t be investing so heavily in the country. According to the U.S. Chamber of Commerce, sales by American companies in China topped $75 billion in 2004.
The report ends with the usual deeply annoying pitch to buy one of MF’s tip sheets, but the info at the top is worth a look.
Cramer’s latest
Finally, world champion TV talking head Jim Cramer has a point:
I believe the stock will get gigantic orders from the U.S. government after the passing of a stimulus plan. You can’t build any infrastructure without Caterpillar’s equipment, and the government ain’t buying tractors from Komatsu. Helped by its 4% yield, the stock will go back to $55, a fantastic move, even though first-quarter earnings will be horrible. Don’t forget, China’s coming back, and that’s a second big customer.
As always, remember what a pain in the ass it was to earn your money before you decide which soulless global corporation deserves a slice of it. Also: we’re in a bear market, which means a 30 percent blast to the downside could come out of anywhere at any time. Caution is your friend.