Amidst a difficult macroeconomic climate, is Caterpillar Inc. (NYSE:CAT) still the right construction stock? How is Cummins Inc. (NYSE:CMI) able to withstand a decline in mining output? Should you invest money in farmland equipment instead, to reap the rewards of a bonus crop? In this article you will find the answers for these questions.
Recent events
Caterpillar Inc. (NYSE:CAT) relies heavily on the growth prospects of China. For the last four months, China’s growth has failed to meet analyst expectations, causing Caterpillar’s retail sales in the Asia/Pacific region to fall by an estimated 23%.
This also marked the company’s first quarterly earnings with a decline. The company’s earnings from the oil sector were also in the negative. The global slowdown is hurting the construction-equipment maker adversely. As the stock price declines, the company has approved a stock buyback worth $1 billion. Being the largest provider of construction and mining equipment, Caterpillar Inc. (NYSE:CAT) relies on a derived demand to supply its machinery.
The global economy has failed to pick up despite numerous attempts by policymakers and bankers across the world. Unless there is increased consumption, investment or government demand in the system, construction companies like Caterpillar Inc. (NYSE:CAT) stand to suffer as their sales will plummet.
Bumper crop ahead
The company’s equipment sales are expected to grow another 5% in the remainder of 2013, which would further add to the impressive financials of the farmland-machinery manufacturer. In the U.S., a bumper crop is expected in 2013, which would continue to increase the purchasing power of farmers and inadvertently increase demand for farmland machinery.
Solid demand
Cummins Inc. (NYSE:CMI) provides industrial and mining equipment along with the sale of large engines to manufacturers. Unlike Caterpillar Inc. (NYSE:CAT), the majority of the company’s revenue comes from sales in the U.S. In fact, only 6% of its revenue comes from China, which make it much less vulnerable to shocks from the developing country.
That being said, the company has been witnessing a quarter-on-quarter and year-on-year decline in its engine sales and other products. However, its overall demand remains strong as it does not sell vehicles itself but provides engines to a lot of truck makers. As long as there is strong demand from the truck manufacturers, Cummins Inc. (NYSE:CMI) will maintain a positive outlook.
Competition
| Indicator | Caterpillar | Deere | Cummins |
|---|---|---|---|
| Price/Earnings ttm | 11.5 | 10.5 | 15.2 |
| Price/Book | 3.1 | 4.0 | 3.4 |
| Net Income Growth (3 Yr Avg.) | 85.2 | 52.0 | 56.6 |
| Revenue Growth(3 Yr Avg.) | 26.7 | 16.1 | 17.1 |
| Dividend Yield , % | 1.83% | 2.21% | 1.69% |
| Return on Equity | 29.9 | 41.0 | 23.3 |
| Current Price | $85.01 | $85.44 | $117.1 |
Data from Morningstar and Financial Visualizations on June 1
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Cummins Inc. (NYSE:CMI) is the most expensive of all the stocks here, while being unable to offer a yield or earnings to top its rivals. While the company has the advantage of geographical diversity, it could also be its downfall as it fails to capitalize of China’s strong growth, which can be switched on after the approval of government spending.
Caterpillar Inc. (NYSE:CAT), on the other hand, has shown good growth in its net income over the last three years despite having recent trouble in China. Furthermore, the construction giant is the cheapest stock on offer. Deere & Company (NYSE:DE) is not far off in being the cheapest stock available, but at the same time it offers a significantly better yield and is highly undervalued.
Final thoughts
At a time when global output is declining, the agriculture industry continues to show signs of strength. Deere & Company (NYSE:DE)’s record earnings in the last two quarters are a testament to the company’s ability to hold its own despite financial and global pressures. I believe Deere & Company (NYSE:DE) has long-term potential which cannot be matched by its rivals and its products become increasingly necessary as farmers employ drought countering seeds. Deere & Company (NYSE:DE) is a clear buy in my opinion.
Marina Avilkina has no position in any stocks mentioned. The Motley Fool recommends Cummins. The Motley Fool owns shares of Cummins. Marina is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Which Machines Can Make You Rich? originally appeared on Fool.com is written by Marina Avilkina.
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