Caterpillar Inc. (NYSE:CAT), the world’s largest manufacturer of construction and mining equipment, reported record earnings in 2012. Its stock has fallen over 12% since Feb. 1 on economic worries and disappointing sales numbers. I believe the selling is overdone and Caterpillar Inc. (NYSE:CAT) is about to rise over 10%.
The drop
The decline in February began after news that U.S. productivity declined 2% in December. Caterpillar relies on economic growth to build demand for its products. The stock continued to fall even after sales for the three months ended in February were announced.
The dismal statistics were:
Global sales decreased 13%
North American sales decreased 12%
Asia/Pacific sales decreased 26%
Europe/Africa/Middle East sales decreased 9%
Latin American sales increased 3%
A record year
2012 was an incredible year for Caterpillar:
Revenues increased 10% to approximately $65.9 billion
Profit per share increased 15% to $8.84
Increased its dividend for the 19th consecutive year
Industry outlook
There are several positives for the mining industry going forward:
Imports of seaborne thermal coal are expected to increase steadily throughout Asia and Europe
Global steel production is expected to continue to rise in 2013, which means there will be a higher demand for metallurgical coal and iron ore
The global demand for copper is expected to grow, mainly due to China’s improving economy
All of these factors will push sales higher over the next several years and eventually to another record year. China held mining back in 2012, but this does not seem to be a continuing theme for 2013 and 2014. Europe is still having issues, but I believe this is the bottom, so it will all be easier treading from here.
Expectations
Through 2015, Caterpillar Inc. (NYSE:CAT) is expected to grow earnings 25.2%. This is not the greatest rate for a three-year span, but it’s the expectation with the current economic climate factored in. Caterpillar has exceeded analyst estimates in five of the last six quarters, so you cannot take these numbers as 100% accurate. I believe Europe’s economy has bottomed and China’s will continue its rebound, causing major demand in the mining industry.
Others in the space
Joy Global Inc. (NYSE:JOY) is a worldwide provider of mining equipment, after-market parts, and services. Its stock has taken a hit on the same economic news as Caterpillar, so it too has the potential for a strong run higher. Joy is much smaller, but it has the power to continue taking share in the space. This stock has also been involved in many takeover rumors, which shows that other companies know it’s undervalued. I think Caterpillar should take a deeper look into this company and make an offer.
Deere & Company (NYSE:DE) is the world’s leading manufacturer of agricultural equipment. It also manufactures construction, forestry, commercial, and consumer equipment. Over 50% of Deere’s revenue comes from agricultural customers, making it less susceptible to the woes of the mining industry while still having exposure. This is a great play if you’re skeptical of a global economic recovery and want to make a bet on agriculture instead. Deere, like Caterpillar Inc. (NYSE:CAT), reported record earnings in 2012.
Current stock snapshot
In the final minutes of trading on March 26, Caterpillar was at $86.96. At this price, it is trading at just 10.2 times current earnings and 7.8 times 2015 earnings. With these multiples in mind, Caterpillar has become a great value and should be bought. It is over 20% below its 52-week high of $109.77 reached in April 2012, and I think it could return to these levels over the next few months.
The Foolish bottom line
The pullback in Caterpillar Inc. (NYSE:CAT) is providing investors with an entry point into one of the greatest companies in the world. Caterpillar is “best of breed” and will have monstrous growth as the global economy strengthens. I currently own Joy Global, but I am looking to swap into Caterpillar if it drops below $85. Take a look and see if this is a long-term investment your portfolio needs.
The article CAT Is Being a Dog, but Not for Long originally appeared on Fool.com and is written by Joseph Solitro.
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