Business World

Friday 27 April 2018

Stock pick of the week: Caterpillar

Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.

The recent acquisition of Bucyrus for $8.6bn (€6.3bn) provides CAT with the most expansive mining equipment product offering in the market.

We would agree with Joy Global’s chief executive in that “we are entering the earlier stages of another multiyear expansion of the industry”.

According to a recent report from PWC, the world’s 40 largest miners by market capitalization plan to invest $120bn in capital spending for 2011, double what they spent last year.

Anglo American and Xstrata plan to double production by 2015.

According to Caterpillar almost three-quarters of surface mining costs are spent on hauling and loading which benefits them directly.

The US accounts for about 30pc of CAT’s sales and machine sales volumes are still over 50pc below the peak in 2006.

The rental fleet age is older than the 2002 recession fleet which should support replacement demand over the coming years.

Shares in CAT have fallen over 30pc in recent weeks on fears of a slowdown in China.

We feel concern over a hard landing in China is overblown (10% of sales). For 2012, Caterpillar is guiding FY EPS of $8.00 to $10.00.

Taking the midpoint of that guidance the stock trades on a PE of 8.8x, a significant discount to its 5yr and 10yr average of 14.5x and 16x respectively. The stock also offers a 2.5% dividend yield, record backlog of $20.8bn and 2015 EPS target of $15-$20 a share. stock picks are not explicit or implicit recommendations to buy or sell the shares mentioned, under the Market Abuse Regulations 2005. Merrion Stockbrokers may be corporate adviser to some of the shares chosen.

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