Tuesday November 08, 2011
by J. Royden Ward, editor Benjamin Graham Value Letter
Our Wise Owl Model uses a system of analysis first developed by Benjamin Graham in 1946; the portfolio contains undervalued stocks of well-known, high-quality companies with steady earnings growth.
Each stock’s attributes are quantiﬁed and measured for stock appreciation potential. Our latest buy based on this system is Caterpillar (CAT).
Caterpillar, founded in 1925, is the world’s largest manufacturer of earth-moving equipment. In addition, the company makes diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.
Caterpillar equipment is used in mining, logging and farming, and in the construction, petroleum and transportation industries.
Caterpillar completed the purchase of Bucyrus International in July 2011 for $8.8 billion. Bucyrus makes monstrous trucks, excavators, shovels, drills and underground mining equipment used in the mining of coal, iron ore, copper and gold.
Bucyrus generates 30% of its sales in North America and 70% in other parts of the world. Sales in 2010 totaled $3.7 billion for Bucyrus compared to $42.6 billion for Caterpillar. Caterpillar reported outstanding results for the third quarter with sales and earnings up 40%.
Slower economic growth in the U.S. and overseas is not affecting Caterpillar’s business because many countries are catching up on infrastructure construction projects, which require new heavy equipment.
The rapid development of infrastructure in emerging countries such as Brazil, China and India provides a bright outlook for Caterpillar for an extended period of time.
In addition, roads, highways and bridges in the U.S. and other developed countries are in dire need of refurbishing and improvement.
Lastly, demand for Caterpillar and Bucyrus equipment will strengthen as a result of the need to replace aging construction and mining equipment.
We expect sales to increase 12% and earnings to increase 19% during the next 12 months, buoyed by infrastructure spending and Caterpillar’s recent purchase of Bucyrus.
The dividend was recently increased for the 18th straight year and now provides a 2.0% yield. At 11.7 times our 12-month forward EPS estimate, shares of CAT are clearly undervalued.
Buy CAT now and sell when the shares increase to 181.95 within two to three years. CAT is low risk.
Learn more about this financial newsletter at J. Royden Ward's Benjamin Graham Value Letter.