Over the past couple of years, I have repeatedly written about machinery-sector analysts and their premature bearishness. I don't believe a single analyst has been strongly bullish on this group over the past year. Each analyst has his or her token buy-rated stocks, but for the most part, the sector has soared without real Wall Street sponsorship.
Into the throes of such negativity, I throw out an interesting long idea:
This stock is still down materially from its recent highs, and it trades for less than 10 times my estimate of next year's earnings. Find a machinery stock -- any machinery stock -- with those two characteristics. You can't.
And yet, Caterpillar is the king of heavy machinery, the best of breed, the CAT-egory killer. It is one of the best-positioned companies in the world to exploit the most attractive secular industrial story out there: global infrastructure. And the best is also the cheapest. How often do you find that?
Investors love sound-bite investment themes, such as the technology era, the clean-water play or aging-baby-boomer concepts.
However, I believe the global infrastructure growth story will have great legs for years to come. As billions of people in China, India, Africa and South America become integrated into the global economy, they require major improvements in infrastructure. Significant investments in roads, bridges, airports, schools, hospitals, factories, mills, mines and refineries are absolutely necessary to support their inclusion into the modern economy.
Other investors have recognized this theme and priced sectors that benefit from it accordingly. A good example of that is the engineering and construction (E&C) group. Check out the stunning price-to-earnings ratio valuations for
. They illustrate that investors clearly aren't completely ignorant about this concept.
But when it comes to machinery stocks generally, and Caterpillar specifically, investors and analysts just don't seem to get it. They worry about Caterpillar's residential exposure. They agonize over its heavy-duty truck business. Won't these exposures kill Caterpillar's story in the short term?
My advice to investors and analysts? Chill out. Look at the housing and truck stocks. Check out the homebuilders, up 50% since summer. Read every truck-related stock on the new-highs list. These stocks are rising right through the industry downturns. And nearly every analyst in both sectors missed the trade.
Caterpillar should be no different. But its roughly 15% exposure to domestic housing and trucks has the investment community on edge. What if Caterpillar misses the first quarter by a few pennies because of loader backhoes or heavy truck engines? Won't the stock plunge? Give me a break. In six months, the whole bear case will be history, just like it was with the other stocks that are hitting all-time highs without Wall Street sponsorship.
At a recent analyst meeting, Caterpillar revealed its long-term growth and profitability targets. The midpoint of those targets yields a $9 earnings-per-share level in a few years. If the company delivers that kind of growth and if the economy and stock market remain healthy, the stock would double from current prices. (It closed Tuesday at $64.42.)
Don't expect Wall Street analysts to promote this interesting long idea. Most of them have missed the bulk of the machinery-stock bull market. They won't dare to jump on board here.
But if you believe in the global infrastructure story, the poster-child company for that theme is downright cheap. And if the housing and trucking stocks have a clue, Caterpillar appears to have limited downside risk and a ton of upside.
BRIC (Brazil, Russia, India and China) is back. Energy is, too. Infrastructure never left. When investors finally get past the first quarter, the shares of this leading global infrastructure company may CAT-apult.
At the time of publication, Marcin was long Caterpillar, although positions may change at any time.
Robert Marcin is the founder of Defiance Asset Management, a private investment management firm. Client accounts managed by Defiance Asset Management often buy and sell securities that are the subject of commentary by Marcin, both before and after it is posted. Under no circumstances does this column represent a recommendation to buy or sell stocks. This column is intended to provide insight into the financial services industry and is not a solicitation of any kind. Neither Marcin nor Defiance Asset Management can provide investment advice or respond to individual requests for recommendations. However, Marcin appreciates your feedback;
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