To buy or not to buy: that is the question. Since I still struggle trying to pull all the information together from the stock selection guides, I will simply put my thoughts about CAT here.
Obviously, we have some large cap stock to fill our portfolio, though I do believe this is still a good buy. In addition to being a large cap, it is also akin to GE in its conglomerate status. It is a company that seems to be in all things dealing with machinery, but here is a nice summary from the Morningstar website.
What Does This Company Do?
Caterpillar manufactures earthmoving, construction, and material-handling machinery and engines. Its products include track and wheel tractors, lift trucks, track and wheel excavators, off-highway trucks, dump trucks, paving equipment, and log loaders. The firm also makes engines used in its own and other manufacturers' machines and in other applications, like power generation. Caterpillar offers financing and insurance services. More than 50% of sales are derived overseas.
Pasted from <http://quote.morningstar.com/Quote/Quote.aspx?pgid=hetopquote&ticker=cat>
The downfall in the mining industry has been a big hit for CAT this year. Even so, the first 3 quarters showed a larger than expected increase in sales. It was not until the fourth quarter that the worldwide downturn made a large impact. Here is a timely article that hits on some highlights of why CAT is flagging in sales and will likely continue to sweat out the economic storm:
NEW YORK (AP) - Shares of companies that make giant mining trucks and big farming tractors fell Thursday on fresh evidence that global demand for their products is falling.
Caterpillar Inc., the world's largest construction and mining equipment manufacturer, on Wednesday reported global retail sales last month down 39 percent, the victim of the global recession and resulting construction slump.
R.W. Baird analyst Robert F. McCarthy said in a client note that the Peoria, Ill., company's "retail demand continues to decelerate globally."
Also Wednesday, Deere & Co., the world's largest farm equipment maker, cut its profit forecast for the second time this year because of falling sales.
Inserted from <http://news.moneycentral.msn.com/ticker/article.aspx?symbol=US:CAT&feed=AP&date=20090521&id=9926933>
The title of CAT's 2008 Annual report is "Big Challenge", which could probably be the title of every annual report published. The implementation of their 'trough plan' is proof enough that the senior management team is more than a little concerned. This initiative aims at cutting 20,000 jobs, rolling plant shutdowns, new cancellation policies for product, decreases in compensation, and targeting spending and efficiency.
CAT has cut expected sales for next year are 40 billion. I had projected out 56 billion, but amended my 2009 profits accordingly. However, I kept a moderate growth of 10% to project the next five years in my analysis. Obviously, from the article above, I could cut my sales projections even further. At this time, I will hold on any additional adjustments until we talk further about CAT.
So what are they doing to weather the storm? The annual statement cites innovation as a driver of staying ahead of the game. In particular, a streamlined process implementation is being implemented worldwide. Probably the best thing they are doing is maximizing workforce and long term assets such as equipment and factories to leverage what they already have. They have also continued to fund research opportunities. From a purely numbers game in an economic crunch, technology and maximizing capital will be the best way to eek out more from a production function, so the emphasis is in the right place.
It seems to me that management is attempting to stay stockholder expectations via dividends with the 75th consecutive year of payments made, and this year was 17% higher than last year. The message this sends is likely hoping that investors will continue to believe in this company.
The most compelling argument for this company is the fact that it's been around for 80 years. It has survived recessions, including the one that encompassed the oil crisis in the late 70's and early 80's. It has survived the changing world economy, including international competition. So, obviously they have done something right.
To look at the annual report, click this link:
I was conservative in my projections. The first adjustment put the projected sales for 2009 at 40 billion then a 10% increase over the next 5 years. I think we can expect to see a decline or less than 10% rise for a year or two, then a boom as the global economy warms back up.
I projected out a high EPS at 7 to reflect the dismal adjustment for 2009 sales. This put the high stock price at 110.73. The possible low I chose was 20, which is a nod back to our severe market low in recent history. This yields a 5:1 upside down ratio and the upside supports a 44% annual rate of return over the next 5 years. This exceeds our compounded rate goal by almost 10%.
I do want to note that this company is lagging in the economic cycle, so patience is the key to purchasing CAT.