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Better Buy: Caterpillar Inc. vs. Deere

By Dan Caplinger – Feb 29, 2016 at 9:11AM

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Both of these equipment-makers have made minor comebacks in the past month. Which looks more promising?

Image: Caterpillar.

Heavy-machinery makers Caterpillar (CAT -1.10%) and Deere (DE -2.08%) have both faced large struggles in recent years, as the construction, mining, energy, and agricultural industries have all suffered downswings in their cyclical performance. Yet in the past month, both Deere and Caterpillar have made minor rebounds because of a bounce in key commodity markets. If the industry is poised for a fresh upward move, which of these two stocks is a better buy right now? Let's take another look at how Caterpillar and Deere compare on some key metrics to see which deserves your attention.

Both Caterpillar and Deere have bounced back from their lows recently. In the past month, Caterpillar is up 15%, and Deere has picked up 8%.

The combination of falling earnings and rising prices has made earnings multiples rise recently. Caterpillar now trades at 19 times trailing earnings, while Deere trades at a cheaper earnings multiple of 14. However, investors still expect earnings for both companies to remain under pressure in the future, and Deere actually has a higher forward earnings multiple of around 19, compared to Caterpillar's 18. Those numbers are close enough to make it a dead-heat between Deere and Caterpillar on the valuation front.

For dividend investors, the share-price increase has lowered both companies' yields, but the advantage still goes to Caterpillar. Deere pays a dividend yield of about 3% right now. Caterpillar has a much higher yield that's approaching 4.6%.

However, the difference in the two companies' payout ratios suggests that the earnings strength that powers their dividends might not fit with their yields. Caterpillar has paid more than 80% of its trailing earnings in the form of dividends, compared to just 40% for Deere. That means Deere could choose to have a higher yield if it returned more capital to shareholders, but it chooses instead to use its earnings for other purposes.

Still, Caterpillar has been better about raising its dividends recently. Despite its earnings woes, Caterpillar boosted its dividend by 10% in 2015, prolonging a streak of annual increases that has extended for more than a decade. Deere, by contrast, didn't raise its quarterly dividend last year, instead keeping it flat as it did during a similar downturn in 2009. For those who rely on dividends, Caterpillar offers an edge.

Fundamentally, both Caterpillar and Deere have seen their businesses struggle lately. In its most recent quarter, Caterpillar posted an overall drop in revenue of 23%. Energy and transportation saw the biggest declines among Caterpillar's segments, with sales falling 29% due to crude oil's plunge and other energy-related challenges. Resource Industries revenue fell 23%, and the Construction Industries segment suffered an 18% decline. The company expects 2016 to be tough as well, with a roughly 10% overall hit to sales coming.

Deere's results were also fairly grim. Overall revenue dropped 13%, with the key equipment sector falling 15%. For the full 2016 fiscal year, equipment sales will likely fall another 10%, with particular weakness in the Construction and Forestry segment holding back the company's rebound. The company's financial services division has helped bolster Deere's overall results, but in general, the weakness in agriculture for Deere is mirroring what Caterpillar is seeing in most of its businesses.

If the market for heavy equipment starts to perk back up, Caterpillar has a slightly better prospect to gain from an upswing. However, Deere could be a winner if any commodity gains are limited to the agricultural market. Overall, that seems unlikely, and so Caterpillar makes a slightly better bet right now.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool is short Deere & Company. 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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Stocks Mentioned

Caterpillar Inc. Stock Quote
Caterpillar Inc.
$164.08 (-1.10%) $-1.82
Deere & Company Stock Quote
Deere & Company
$333.89 (-2.08%) $-7.11

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