This Company’s Valuation Becoming Attractive

Valuation Becoming AttractiveAn enormous amount of effort goes into building a decent golf course. It isn’t just some nicely cut grass carved out of the bush.

After several summers as a teenager working in golf course construction, I can tell you that building a golf course requires a lot of planning.

The crew I worked with would go into an existing golf course and rebuild an entire hole. Or a green that wasn’t draining properly.

The problem—and the most delicate part of this endeavor—was to be careful not to wreck all the services that were buried in the ground. These included irrigation, drainage, telecom, and power lines.

While operating a Case backhoe, I cut through a large electrical line that was missed by the locate crew.

Needless to say, you reevaluate your priorities pretty quickly when something like this happens. An enormous flame shot up out of the ground.

Case Corporation doesn’t trade on the stock market. It is now part of a company called CNH Global N.V. (NYSE/CNH) out of the Netherlands, Fiat Industrial S.p.A being its majority owner.

On the stock market, Caterpillar Inc. (NYSE/CAT) is one of the largest players in heavy equipment. The company was doing really well a few years ago when the construction boom in Asia combined with the mining boom to produce significant growth.

The position is down from its previous stock market high, but the company is not expensively priced.

With a current price-to-earnings ratio of around 12, the position boasts a current dividend yield of 2.3%. If it was over three percent, then Caterpillar would be a much more attractive stock market opportunity.

This fiscal year, Wall Street expects the company’s revenues to fall about 10% comparatively. Solid growth for the company is expected to resume in 2014.

As much as Caterpillar is in the business of manufacturing and selling heavy equipment, it is also an enormous financing company.

Normally, in the first quarter, the company and its dealers build up inventory in anticipation of the spring/summer sales season. The company cut its inventory in the recent first quarter due to slower business conditions.

Total revenues for this year were reduced to an expected range of $57.0–$61.0 billion, down from the previous range of $60.0–$68.0 billion. (Read “Why DuPont’s Earnings Results Are So Typical for This Stock Market.”)

Caterpillar has also had problems in China regarding an acquisition that was later found to have accounting irregularities.

On the stock market, the company has been flat for the last year, but like I said, it’s not expensively priced.

Caterpillar is a well-managed business that makes great products. (Learning how to operate a backhoe was a lot of fun.)

The company’s growing cash balance could produce another dividend increase this year, making it a better stock market opportunity.

Investing success with a company like Caterpillar is about getting the business cycle right. A lot does ride on business conditions in Asia now. The stock market won’t bid the shares with slow growth from that region.

With a little more certainty in the global economy, Caterpillar would be worth considering in this stock market, based on its valuation and dividend yield.

One of these days, I’d like to try operating a big bulldozer. Without question, I’ll make sure there are no power lines around—that was an illuminating experience.