{"id":25188,"date":"2011-11-14T09:00:25","date_gmt":"2011-11-14T14:00:25","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/11\/14\/caterpillar-earnings-at-all-time-highs-on-emerging-market-growth\/"},"modified":"2011-11-14T09:00:25","modified_gmt":"2011-11-14T14:00:25","slug":"caterpillar-earnings-at-all-time-highs-on-emerging-market-growth","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/11\/14\/caterpillar-earnings-at-all-time-highs-on-emerging-market-growth\/","title":{"rendered":"Caterpillar: Earnings at All-Time Highs on Emerging Market Growth"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

\"\"<\/a>As we start another week, market attention will no doubt be focused again on Europe\u2014as well it should be.\u00a0 The developments in Italy in the coming months may well determine whether the Eurozone survives in one piece (See \u201cItaly and the Fate of the Euro<\/a>\u201d<\/strong>)\u2014or whether the world economy enters a deep recession again for the second time since 2008.<\/p>\n

Europe\u2019s best days are behind it.\u00a0 The continent whose states once controlled globe-spanning empires and which once was the very definition of progress and modernity is now a society burdened by excessive debts and permanently weakened by aging demographics.<\/p>\n

But regardless of what happens in Europe, there are several promising pockets of growth to be found in others parts of the globe.\u00a0 For all of the fears of Chinese growth slowing, the country is still growing at a pace that would cause most finance ministers to salivate. A \u201cslowdown\u201d in China still means GDP growth of over 9 percent.\u00a0<\/strong> Likewise, on the other side of the globe, Brazil, Peru and much of the rest of South America is enjoying a rise in living standards and economic and political stability not seen in decades.\u00a0 India, Turkey and Indonesia continue to enjoy robust growth as well.\u00a0 The average citizen in any of these countries might well wonder what all of the hand wringing in the United States and Europe is about.<\/p>\n

In the Sizemore Investment Letter<\/em><\/a>, we\u2019ve been recommending \u201cback door\u201d ways to get exposure to these high-growth countries by buying American and European companies with high exposure to emerging markets.\u00a0 Our preferred way to do this has been through the consumer products sector and mobile telecom sectors.\u00a0 Companies like Procter & Gamble ($<\/span>PG<\/a>),<\/strong> Telef\u00f3nica ($<\/span>TEF<\/a>)<\/strong> and Unilever ($<\/span>UL<\/a>)<\/strong> have the strength to withstand a potential financial day of reckoning in the United States or Europe while also offering real growth from the rise of the emerging market middle class consumer.\u00a0 But certainly, there are more ways to skin this cat.<\/p>\n

The boom in commodities prices and materials stocks since 2000 has largely been an emerging market story.\u00a0 The rise of the middle classes has meant rapid urbanization and massive construction and energy projects that would have been inconceivable not that long ago.<\/p>\n

I\u2019ve avoided the building and materials sectors in recent years because, frankly, the \u201cmaterials as a play on China\u201d<\/strong> trade seemed a little crowded to me.\u00a0 But after a year of gut-wrenching volatility, investors have largely lost interest in growth investing altogether.\u00a0 And to me, this smells like an opportunity for a good contrarian trade.\u00a0 As a rule, I like long-term investable themes that have managed to avoid the attention of mainstream investors.\u00a0 And with investors now shunning materials, I\u2019m starting to like what I see.<\/p>\n

\"\"<\/a><\/p>\n

Figure 1: Caterpillar vs. S&P 500<\/p>\n<\/div>\n

Let\u2019s consider Caterpillar ($<\/span>CAT<\/a>)<\/strong>, the world\u2019s premier maker of construction and mining equipment and machinery.\u00a0 Caterpillar gets a little over a third of its revenues from emerging markets, and that percentage continues to grow.\u00a0 The 2000s real estate boom in the United States and parts of Europe was a boon to Cat\u2019s business and stock price (see Figure 1<\/strong>).\u00a0 But when the boom went bust, the company\u2019s good times came to an end and the stock price fell by nearly 75 percent.<\/p>\n

But then, a funny thing happened.\u00a0 Boosted largely by growth in China, South America, and other emerging markets, Cat\u2019s business mounted a comeback.\u00a0 And for investors brave enough to hold on, so did the stock price.\u00a0 Over the past five years, Cat\u2019s share price is up 60 percent vs. a loss of 10 percent for the S&P 500\u2014and this includes the price implosion of 2008.<\/p>\n

The third quarter of 2011 was the most profitable in Caterpillar\u2019s history<\/strong>.\u00a0 Both revenues and earnings hit all-time highs.\u00a0 Not bad when you consider that Europe has most likely been in technical recession for most of the year and the United States not far behind.<\/p>\n

Caterpillar knows where its future is.\u00a0 It is planning an aggressive bid for China\u2019s ERA Mining Machinery, a major manufacturer of underground mining equipment in mainland China. \u00a0Should the deal go through, this will most likely not be the company\u2019s last emerging market acquisition.<\/p>\n

A worsening of the European debt crisis\u2014or a hard landing in China\u2014would take a bite out of Cat\u2019s growth.\u00a0 But at current prices, it would appear that we are being amply compensated for that risk.\u00a0 Caterpillar trades for just 10 times expected earnings and for less than one times expected sales.\u00a0 It also yields a modest 1.9 percent in dividends.\u00a0 Though that may not sound like much, it\u2019s only marginally lower than the yield you can get on a 10-year Treasury note.\u00a0 And Cat\u2019s dividend, unlike the interest on the Treasury note, will actually grow with time if history is any guide.\u00a0 The dividend has nearly tripled<\/em> since just the year 2000.<\/strong><\/p>\n

The stock market remains in a state of heightened volatility, and Caterpillar is roughly twice as volatile as the broader market (as measured by beta).\u00a0 So, investors considering Caterpillar should expect a rough ride.\u00a0 I recommend that investors wanting to take advantage of the company\u2019s growth prospects buy the stock on any significant pullbacks.\u00a0 If the volatility of recent months is any guide, we should have plenty of good buying opportunities in the weeks and months ahead.\u00a0 <\/span><\/p>\n

If you liked this article by Sizemore Insights<\/em>, you\u2019d probably enjoy The Sizemore Investment Letter<\/em>, our premium members-only newsletter. Click here<\/a><\/strong> for more information.<\/p>\n","protected":false},"excerpt":{"rendered":"

By The Sizemore Letter As we start another week, market attention will no doubt be focused again on Europe\u2014as well it should be.\u00a0 The developments in Italy in the coming months may well determine whether the Eurozone survives in one piece (See \u201cItaly and the Fate of the Euro\u201d)\u2014or whether the world economy enters a … <\/p>\n

Continue reading “Caterpillar: Earnings at All-Time Highs on Emerging Market Growth”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-25188","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/25188","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=25188"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/25188\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=25188"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=25188"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=25188"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}