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Should Caterpillar Claw its Way into Your Portfolio?

Tuesday, March 27th, 2018

It wasn’t long ago that Caterpillar, symbol CAT was trading around $80/share and it appeared it was to remain there for a while. Fast forward to today and we see the stock is now $149/share. So, if you bought it back then is now the time to sell or should one hold for higher levels or maybe buy it now if you don’t hold it in your portfolio.

Let’s compare the fundamentals for a clearer picture of this company. CAT has been in existence since 1925, building big construction type tractors and are famous for their frontend loaders and trucks. The stock has a fifty-two-week high/low of $173.24/$90.34. Employing 98,500 people worldwide, they are headquartered in Deerfield, Illinois and compete in the industry of farm & construction machinery.

Within the last five years the PE has been as low as 15.8 but not today, it is much higher at 28.5. This is still below the industry average of 33.3. Price to sales is also high for the company at 1.96 compared to the industry at 1.27. Price to tangible book value checks in at 16.6 just slightly above the industry average of 13.3. Price to cash flow for Caterpillar is 14.9 just a hair above the industry average of 14.4. Except for the PE ratio all the valuation ratios are above the industry average which is a sign the stock could be pricey.

The company pays a 2.1% dividend using 59% of the earnings to accomplish the payout.

Sales are looking very good year over year for the last 12 months, climbing 18% and beating the industry average of 12.9%. EPS for the same period looks strange because Caterpillar is coming off what appears to be such low comparisons and showing a 4,300% increase compared to the industry at 276%.

The balance sheet looks worrisome with a debt to equity of 254% in a high debt industry of 207%. The reason for the high debt to equity is Caterpillar finances their equipment for some of their customers. If I held this stock or was looking at buying it I would want to know exactly how much that number is. The current ratio is 1.4 for the company which is not quite as good as the industry at 1.7, but there is nothing to worry about at that level.

The return on equity over the last 12 months was 23.3% which totaled $13,697 billion. The company has an attractive net profit margin of 6.9% almost double the industry at 3.8%.

Caterpillar has done a good job collecting on their receivables over the last 12 months, turning it over 6.8 times far better than the industry at 2.6 times. Inventory turnover for the last 12 months was 3.3 for the company, under the industry average of 4.1. I contribute the lower turnover to the large size of the equipment the company sells.

Looking forward to 2019, the revenue is expected to grow by about $8 billion to $54.7 billion. This revenue growth should produce EPS on a GAAP basis of $9.95. Based on the historical FPE average of 16.5 the target sell price comes in at $164 per share. That number was hit in January of this year when many companies got ahead of themselves on their stock price. If you hold it, I would not panic just sit tight. If not, I would not buy it now but wait for the stock to drop to about $130, then maybe I could give a buy recommendation. But in this current volatile market it would not surprise me to see the stock fall to that level.

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