Caterpillar (CAT)

The new president has made a pledge to spend money on infrastructure across the United States because he believes it is a way to strengthen the economy. While the country is spending money to build/maintain roads and bridges, CAT will reap the benefits of increased demand for their equipment. The president-elect has proposed a so-called "infrastructure bank," aimed at investing $60 billion over 10 years. Estimates of what the United States needs are even higher, with the American Society of Civil Engineers estimating the need for $1.6 trillion over 5 years. In their opinion, this would only upgrade the country's infrastructure to "good." Regardless, there will be increased spending on infrastructure and, because of this, CAT will see increased demand in the U.S.

CAT’s international basis will lead to profits from the drive for Asian infrastructure, energy, and mining opportunities.

Whereas CAT has traditionally been considered a cyclical business, this label is being reevaluated as CAT maintains strong revenue and profit growth despite a major downturn in the US construction industry during 2008. A large part of this continued growth stems from CAT's greater international presence and the worldwide infrastructure boom discussed above, yet at the same time CAT has diversified into new areas such as financial products and long-term service contracts, which ensure the company continued revenue for years after the sale of a piece of machinery. These changes should help sustain earnings even in times of slack demand.

Contractors, builders, and kids, YES kids all want Caterpillar! When a company has been a world leader for this many years and then enters the consumer market like clothing and toys it becomes a staple in the minds of all people. Kids grow up and if they enter the construction field the very first company that will enter their minds when it comes to construction equipment will be CAT. To back this up, take Budweiser for example. This beer company spends hundreds of millions in creating a brand loyalty not only to their current drinkers but to the future ones. In closing, CAT will be here and well into the future and they will continue to be the world leader in the manufacturing of heavy equipment. I feel it is a strong buy right now at this current price!

Caterpillar on Monday said much the same thing. Their 4th quarter looks a bit better as sales were up 6% and though operating profit was off 64% most of that was due to increases in costs rather than a decrease in sales or prices. But business going forward is going to be rough. They are putting into place their “strategic trough plans” in preparation for a very difficult year. Sales are forecast to be off about 20% and machine and engine volume, their core business, off 30%. As a consequences, they are laying off 20,000 workers - about 11,500 of them full time employees, which works out to about 10% of their overall full time workforce (read CAT Earnings Release).

But what I’m focusing on is the fact that we’re moving along in the process of adjustment. Everybody now knows that the economy is in the tank. Companies have already taken and are continuing to take steps to realign their operations with the current environment.

Caterpillar earned $5.66 in 2008 and is forecasting trough profits of $2.50 in 2009. Again, that’s like 13 times next years earnings but a more attractive multiple on normalized earnings. From a longer term standpoint that includes more than just 2009 and takes into account years after that when the global economy will recover, these stocks are now getting to be fairly/attractively valued.

It now just becomes a matter of time, of reallocating labor and capital to fit the new environment which has to take place in the real world. But as far as perception and understanding, the stock market and most businesses seem to fully understand the current environment and what’s ahead. That means we’re well on our way to equilibrium and, absent any unforeseen shocks, the stock market is more likely to be range bound than dramatically lower in 2009.

CAT is largest publicly traded company in Illinois from where Senator, now President Obama, hails. Chairman of CAT is on Obama's economic advisory team. President Obama scheduled for CAT site visit in Peoria, Thursday February 12, 2009. CAT is the infrastructure play for Stimulus plan this year.