There’s no denying that Caterpillar Inc. (NYSE:CAT) stock has been stuck in a rut lately. While many sectors of the economy have been staging strong recoveries since the recession, the world’s largest heavy-equipment maker has been suffering from weakness in the global mining industry and delayed infrastructure spending. This wasn’t a shock to Caterpillar: the company slashed its long-term outlook nearly a year ago in anticipation of weakness in the mining market. However, all this bad news has caused Caterpillar Inc. (NYSE:CAT) stock to get beaten down well below what the company is actually worth. Today, Caterpillar stock presents a great opportunity for investors seeking value plays, defensive stocks, and dividend income.
It’s a fire sale!
The first thing that jumps out today about Caterpillar Inc. (NYSE:CAT) is how cheap it looks. The stock is trading for less than 9 times forward earnings, a good 40% under the S&P 500. It’s true that the company is facing some real challenges. In the wake of the recession, cash-strapped governments have been delaying the infrastructure and construction projects that constitute Caterpillar’s bread and butter. Over the past few years, Caterpillar pivoted toward mining, purchasing the mining equipment manufacturer Bucyrus. Mining made up about a third of sales in 2012, but low commodity prices have led miners to reduce capital spending and, as a result, Caterpillar Inc. (NYSE:CAT) expects the sales of mining machinery to fall by as much as 50% in 2013.
Despite these challenges, however, Caterpillar Inc. (NYSE:CAT) stock has simply gotten too cheap. Equipment for construction, mining, and power generation is absolutely necessary for any real economic growth or improvement in the standards of living for people worldwide, and any fall in equipment sales should be considered a delay, rather than a loss. Caterpillar is hurting now as dealers seek to reduce their inventories — in the first quarter of 2013, Cat dealers shed $700 million in equipment inventory — but once growth resumes, these dealers will have to rebuild their stocks. As an industry leader in quality, innovation, and brand, Caterpillar is in no serious danger of losing its formidable market share in North America, and is actively expanding its presence in Latin America and East Asia. Global development and infrastructure building will resume eventually, and Caterpillar stock is poised to soar when it does. For a company with a historical price to earnings ratio near 20, buying in at under 9 looks positively genius.
Recession-proofing the business
For the bears out there, Caterpillar is a remarkably resilient company even in the worst of times. In the company’s 88 years of business, only 16 times has the stock recorded an annual loss, and most of those were during the Great Depression. The essential nature of Caterpillar’s product line as well as its industry leadership provide a level of revenue stability rarely seen outside utilities. After the 2008 recession—during which Caterpillar remained profitable and its stock significantly outperformed the S&P 500—the company focused on cutting costs out of the business, and since then SG&A expenses have fallen steadily. Recognizing the boom-and-bust nature of the business, management has also carefully monitored research & development and capital expenditures, and is prepared to tighten the belt in the case of another economic pullback. As a result of these measures, CEO Doug Oberhelman believes Caterpillar would remain solidly profitable even in the face of a drop in sales of nearly 40%, which would be the worst decline in the company’s history. That’s a stock that can help an investor survive another recession.
