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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Caterpillar Inc.

April 17th 2013 Caterpillar
NYSE Symbol: CAT
Industry: Farm & Construction Machinery
Price as of 4/16: $82.61


The major averages are bouncing back today following a commodity crash yesterday and then the terrorist attack at the Boston Marathon. It's been a resilient market so far in 2013 with all the major averages up double digits. Although the major averages continue to perform well, there are a few chinks in the armor. Industrials, materials, energy, and technology sectors are underperforming the S&P 500. Commodities have taken it on the chin due to concerns of global growth. We'll see what corporate earnings over the next two weeks tell us regarding global growth. The best performing sectors so far this year are healthcare, consumer staples, utilities, and telecom all defensive sectors with modest if no revenue growth projections. April is typically one of the best performing months of the year, but also typically signals a short term top in the markets, hence the term, Sell in May and Go Away. Since 1950, the Dow Jones industrial average has produced an average gain of 7.4 percent from November through April and only 0.4 percent from May through October. This year the S&P 500 is up 12% since November 1st. The market volatility also picks up in the May to October period with virtually all major market crashes occurring in this six month period. Understandably many investors are getting cautious, but the typical move into defensive issues probably won't work this year. So what to do? The best option, at least long term, should be to rotate into the underperforming sectors. This week, we'll highlight a blue chip Industrial in an 18% correction which sports a 2.5% dividend yield. The stock of the week is Caterpillar. In the short term Caterpillar may have more downside, but long term the company is well positioned and looks attractively priced particularly verse most other sectors.

Caterpillar will report next week so we'll have a better picture of the business environment on Monday. A number of concerns have hit the stock recently. First the global growth numbers keep coming in weaker than expected thanks in part to China's economy. The mining companies are compounding the problems for Caterpillar. Weak commodity pricing is causing many miners to cut back on production and also machinery orders for new equipment. Last quarter, Caterpillar said 2013 profits could shrink if the world's economy doesn't pick up in the second half of the year, as mining companies and builders remain cautious about buying new gear. But if the economy revives later in the year, 2013 could be a record year for Caterpillar. Management is being cautious because the last two years growth and confidence declined in the second half of the year causing Caterpillar to report mixed results. The good news is the stock is pricing in some and hopefully most of this cautious guidance.

With the recent pull back in the stock, Caterpillar currently trades for 10 times earnings and 9 times next year's earnings although estimates have been coming down. The broader market PE is 15. Caterpillar would have to rally 70% to obtain a market multiple. Two analysts have revised their price targets recently, but still have $109 and $110 price targets, 32% above current market prices. Caterpillar will report earnings next Monday, but will go ex-dividend this Thursday. Cautious investors may want to wait to see the earnings Monday before buying the stock. On the charts, the stock has good support at the $80 price level and hopefully that level holds in the short term. Long term, Caterpillar is well positioned to benefit from global growth.