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In China, the tiger is commonly thought of as lazy, merely appearing to be strong and ferocious.
But that's truly not the case. The tiger does not waste his energy showing his strength. Instead, it sees the future and knows precisely when to pounce on its prey. Those who can see past the great wall of today and look into the future – much like our wise friend, the tiger – understand just what it takes to be successful.
If we were to analyze the growth potential for the worldwide construction industry, we would find that Japan's Komatsu Ltd. (OTC ADR: KMTUY) and the U.S.-based Caterpillar Inc. (NYSE: CAT) are best-positioned for global success.
Although both are solid companies, it's Caterpillar that possess the real eye of the tiger. Cat also offers far more in growth potential than any of its peers, especially with five-year annual earnings-per-share (EPS) growth of almost 29.4% and a total-gross-profit margin at more than 26%.
According to the most recent figures from the U.S. Census Bureau, month-over-month construction spending in the United States declined by 1.2% — double the forecasted decrease of 0.6%.
While construction spending here in the United States has declined, the outlook in other countries is much more upbeat. China, for example, is reporting increases in construction spending every month, and Australia reported a 57.7 on the AIG Construction Index, indicating expansion.
When a sector is experiencing growth to the extent that these overseas markets are expanding, it's important not to miss out on excellent opportunities for major portfolio growth.
A country's success in the development and/or improvement of its infrastructure depends on the use of superior machinery. Who is better-positioned to meet these needs than Cat, a U.S.-based heavy-equipment-maker whose trademarked black-and-yellow trucks and earthmovers are ubiquitous sights on construction sites all around the world.
Caterpillar's revenue exceeded $32 billion in 2009, and its assets totaled more than $57 billion. With a market capitalization of more than $35 billion, Cat is the largest company in its sector. It also pays investors a hefty dividend of nearly 3%.
With more than 500 dealerships dispersed throughout more than 50 nations, Caterpillar is well-positioned to service its global customer base. And the company's presence in the so-called "BRIC" nations – especially in China – is growing at a high rate, but one that's consistent enough to be healthy.
While the National Bureau of Statistics of China reported gross-domestic-product (GDP) growth of 8.7% in 2009, the country's heavy-industry growth was 11.5%.
It is clear that China has been spending billions on construction. And that country isn't alone.
Since last June, according to Caterpillar-rival Hitachi Construction (Nasdaq: HTCM.Y), China's demand for construction machinery has been increasing at an enormous rate on a year-over-year basis. And although construction spending declined slightly, dropping 0.4%, that was actually half the anticipated decline of 0.8%.
Caterpillar's existence in China is key to its successful development, where high-speed railways, bridges spanning tens of miles, and endless ribbons of roadway are being built to connect major cities to one another – as well as to that nation's vast countryside.
China has reportedly set aside a large portion of the $600 billion stimulus it initiated during the global economic meltdown to accomplish these goals of increased and sustainable growth. In 2009, the Chinese government, along with its state-owned subsidiaries, completed a high-speed railway from Guangzhou to Wuhan, including the Guangdong section, which it finished in December. Now it's working to complete the Beijing-Shanghai high-speed line by 2011.
To better serve its customer base, Caterpillar has made several strategic acquisitions in the last two years. In January 2008, for instance, it purchased 60% of the remaining equity interest in Shandong SEM Machinery Co. Ltd. (SEM), a wheel-loader manufacturer in China.
In April 2008, Caterpillar extended its global mining business by acquiring Lovat Inc., a manufacturer of tunnel-boring machinery used in the construction of metro, railway, road, high voltage cables, and telecommunications tunnels. In 2008, it also obtained specific assets of Gremada Industries Inc., a company that remanufactures and reclaims metal parts and provides service support for off-highway equipment to the mining and petroleum industries.
In December, Caterpillar signed a joint-venture (JV) deal with China Yuchai International Ltd. (NYSE: CYD). Once the deal receives final government approval, the new JV company will provide the most sophisticated remanufactured engines and components for Yuchai's diesel engines, as well as for specific Caterpillar diesel engines. The new company will back the Chinese government's goal to realize a sustainable economy.
Remanufacturing, an advanced form of recycling that aids in the reduction of waste and decreases the need for raw materials to make new parts, will help pave the way for more green jobs, as well as new-and-improved technologies.
Caterpillar has dedicated itself over the years to technologies and policies that are designed to slow – and perhaps even stop or reverse – the escalation of greenhouse gas (GHG) emissions. Most recently, Cat made known its plan to team up with the FutureGen Alliance in building the first coal-fired, near-zero-emission power plant in Illinois.
After reporting dismal earnings for the first time in 17 years in the 2008 fourth quarter, Caterpillar has eclipsed analysts' estimates for the last four quarters, which has substantially elevated the outlook for the Peoria, Ill.-based heavy-equipment firm. Morgan Stanley (NYSE: MS) recently upgraded Caterpillar from "Underweight" to "Outperform," stating that the company is poised to benefit from worldwide construction. At the same time, Morgan increased its target price for Cat shares from $51 per share to $70.
Cat shares have traded between $26.73 and $64.42 in the last 52 weeks. They closed Friday at $59.37.
In early January, Caterpillar's stock began trading down, primarily due to weak global economic news. From a technical point of view, Caterpillar has a beta between 0.00 and 2.00, and EPS greater than 1.40. The stock formed a rising wedge and is predicted to stay flat at roughly $52 to $55 per share.
That being said, Caterpillar is currently oversold based on the Relative Strength Index (RSI). The On Balance Volume (OBV) and the Stochastic Oscillator are also both bullish. A probability analysis indicates the stock has a 60% chance of remaining in the $50 to $65 range for the next four to six weeks.
It's no coincidence that 2010 is the "Year of the Tiger." Given that insight, it's clear that the Year of the Tiger is the Time for the Cat.
Recommendation: Buy Caterpillar Inc. (NYSE: CAT) into daily weakness, dollar-cost averaging over the next four weeks, in order to limit the current market volatility (**).
(**) Disclosure: The writer holds no interest in Caterpillar Inc.
News and Related Story Links:
- U.S. Census Bureau:
Official Web Site. - The Wuhan-Guangzhou High-Speed Railway:
Official Web Site. - ThomsonNetNews:
Caterpillar Completes Acquisition of Shandong SEM Machinery Co. Ltd. - PRNewswire:
Caterpillar Announces Entry Into Tunnel Boring Business With Acquisition of Lovat Inc. - Gremada Industries Inc.:
Official Web Site. - Wikipedia:
Greenhouse Gas Emissions. - Remanufacturing News:
Caterpillar signs JV agreement with China Yuchai for remanufacturing diesel engines & components. - FutureGenAlliance.org:
FutureGen Adds Caterpillar as Partner, Continues to Build Momentum. - Investopedia:
Relative Strength Index. - Investopedia:
On BalanceVolume. - StockCharts.com:
Stochastics Oscillator. - YearoftheTiger.net:
2010: Year of the Tiger.
About the Author
Sid is the investment community's best-kept secret. Since 2009, he's served at Money Map Press as Director of Research, analyzing thousands of securities and profit opportunities for subscribers. He's an expert in identifying "alpha" potential in a wide variety of industries, but especially the small-cap sector, where he's discovered a pattern of profits that's almost foolproof.
Tags: Asia Investments, BRIC, Buy Sell Hold, Caterpillar Inc., China, Construction, Hitachi Construction, Japan, Morgan Stanley, Sid Riggs, Stocks