Should You Let This Cat Out of the Bag?

With the agriculture sector booming and construction equipment demand rising globally, companies involved in the farm and construction machinery business are having a really good time. Most have reported robust numbers in their recent quarters, including the bellwether Caterpillar (NYSE: CAT  ) .

The Illinois-based company’s second-quarter bottom line grew a robust 44% from last year, prompting management to raise the full-year guidance. But numbers alone aren’t enough to use to decide whether the stock is worth investing in. I am going to take a deeper look to help Fools decide how closely they should watch this stock.

Operational performance
Increasing global demand for its products along with better price realizations have been boosting revenues for Caterpillar. While revenues grew at a compounded average rate of 5.8% over the past half-decade, what stands out is the whopping 51.1% revenue growth rate the company experienced in its last full year.

The company has also maintained a high earnings growth rate, having an astounding one-year net income growth of 154%, as it continued to rebound strongly from the depths of the global economic downturn in 2009.

Growth and stability
Caterpillar has continued expanding its business operations, with a keen eye on emerging markets. It recently completed one of its biggest deals by acquiring Bucyrus International to capitalize on the growing mining equipment market.

Caterpillar also seems to have the highest exposure to the growing Asian markets among most of its peers. It continues to aggressively expand in China, adding more depth to its already solid global presence. Through its tie-in with Navistar International (NYSE: NAV  ) , Caterpillar is also expanding its trucking operations in the Australian and South African regions.

Because of such heavy investments, debt levels are bound to be on the higher side. Caterpillar’s total-debt-to-capital ratio is high at 71.2%. However, strong operating margins and a huge war chest of $9.5 billion provide enough comfort.

Value insights
Let’s take a look at how Caterpillar’s valuation stacks up next to some of its peers':

Company

Trailing P/E

Forward P/E

P/BV

Caterpillar 13.8 10.9 4.0
Deere (NYSE: DE  ) 12.5 10.7 4.2
Cummins (NYSE: CMI  ) 12.3 10.0 3.5
CNH Global (NYSE: CNH  ) 9.9 9.1 0.9
PACCAR (Nasdaq: PCAR  ) 18.8 12.3 2.3

Source: Capital IQ, a division of Standard & Poor's.

Caterpillar might not look like a bargain if you look at the earnings multiples. Price-to-book value, which is relevant for a capital-intensive company, also remains high. But it does not necessarily mean that the stock is overvalued. Caterpillar’s ROE, at 35%, is impressive even considering its high debt load, so the market seems to be factoring in Caterpillar’s strong fundamentals.

Caterpillar’s dividend history is also impressive, and the current dividend yield is quite nice at 2.2%. A moderate payout ratio of 28% further provides a margin of safety to investors in relation to the high debt levels.

The Foolish bottom line
With a strong business line, good performance and great growth moves, Caterpillar looks well placed to take advantage of the growing global markets. I wouldn’t mind keeping this Cat in my bag of stocks.

You can do the same, and stay updated on the company’s news and analysis by clicking here to add it to your stock Watchlist.

Neha Chamaria does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of PACCAR and Cummins. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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