Caterpillar (CAT) and its stock had a rough 2015, but shares have rebounded handsomely this year and Caterpillar appears poised for a great 2017.
The sharp selloff in oil prices in the second half of 2014 and all of 2015, along with slowing economic growth in China, reduced demand for Caterpillar's industrial machines, which are used by oil producers and were crucial in China's explosive infrastructure development of recent decades.
As a result, Caterpillar's revenue fell sharply last year, to $47.01 billion from $55.18 billion the year before. Net income plummeted to $2.10 billion from $3.70 billion. The five-year chart below shows the impact on the stock, which lost 26% of its value in 2015.
But then, the sluggishness in oil price is gradually drawing to a close, and with America soon to elect a new president, Caterpillar looks all set to post a recovery and become a growth stock winner.
The stock's up 20.7% year-to-date, after losing sizable value last year. It seems CAT is ready for a great 2017.
Over the last 90 years CAT has emerged as the world's top maker of construction and mining equipment, diesel and natural gas engines, among others. It's also a solid long-term investment with total shareholder returns in the top 25% of the S&P 500.
Things took a nosedive after the energy price downturn.
Deutsche Bank says 64% of CAT's revenue is finally reaching bottom, suggesting scope for a positive inflection in mining, well servicing and Brazil construction in 2017.
There's also possibility that the next U.S. president will undertake a massive infrastructure spending initiative.
Donald Trump is keen to launch a blitz of construction, for roads, bridges, railways, tunnels, seaports, and the like. Rival Hillary Clinton also has suggested $275 billion in direct spending on infrastructure over the next five years and another $225 billion in loans.
These are solid positive signals for CAT and its peers like Terex, Astec Industries,Douglas Dynamics and Manitowoc.
Specifically for Caterpillar, the double body blows in the past from mining and energy industry clients has hurt CAT's "Resource Industries," pushing losses in a segment once responsible for generating heavy profits.
And this is where we think CAT (shares are actually flat over the last five years) can finally locate a smart long-term opportunity.
Analysts tracking Caterpillar see a definite turnaround.
After posting a projected 24.6% drop in earnings-per-share (EPS) this year (ending Dec. 2016), Caterpillar should bring in a 1.1% recovery in 2017.
The last five years have been dismal, with a 16.5%-plus drop in EPS every year in this period. With infrastructure spending on the anvil and energy markets grinding upwards, it's time for a revival. CAT should post 5.5%-plus EPS growth annually for the next five years (peer Deere is still sometime away from a turnaround).
CAT is also going to be a sharp dividend-generator. Its 3.75% yield is much higher than the industrial goods average. Backed by annual dividend hikes since 2010, Caterpillar can still offer moderate hikes, which could only grow even as earnings numbers move ahead.
In comparison, the Deere & Co. (2.93%) yield or others like NACCO Industries,Lindsay and Oshkosh (with yields in the range of 1.4%-to-1.7%) don't carry the same sheen.
Our bottom line -- buy CAT shares today and watch its comeback story unfold.
By: Chiradeep BasuMallick (The Street).
Photo: Yahoo.
Review: Emerging Market Formulations & Research Unit, FLAGSHIP RECORDS.
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