Caterpillar Stock Set for Many Legs Up in ’12

After nearly quintupling from the bear-market bottom of 2009, shares in
Caterpillar (NYSE: CAT ) have had a lousy run in 2011. Thats great news for
investors looking to build a position in this high-quality stock on the cheap.
Caterpillar is the worlds largest maker of construction and mining equipment,
and its trading at bargain-basement levels with fears of a global economic
slowdown more than baked into its share price. CAT stock, a component of the Dow
Jones Industrial Average, has lost 7% as of this writing in 2011, lagging the
broader markets tiny gains year-to-date. Even worse, the stock logged its loss
in the most gut-wrenching fashion. It was up more than 20% by early May and
then down nearly 25% at the start of October. Indeed, with a beta of more than
2.0, Caterpillar has been twice as volatile as the S&P 500. (Shares sport a
nauseating 52-week range of $67.54 to $116.55.) Chalk it up to macroeconomic
uncertainty, as well as institutional investors being forced to sell some of
their winners. Caterpillar is finely attuned to the global economy, and anxiety
over recession in Europe and a possible slowdown in China has beaten a good
stock down. And yet a funny thing happened on the way to the recession: it never
showed up in Caterpillars quarterly results or monthly dealer statistics. Dealer
retail sales grew 31% in October from a flat September, despite macro worries,
notes Jefferies analyst Stephen Volkmann, who has a buy rating on the stock. Not
only did the North American machinery business reaccelerate, but demand from
Asia picked up, too, noted Raymond James analyst Theoni Pilarinos, who rates
shares at outperform. Thats especially comforting given that China is just now
gearing up for the seasonally strong months following Chinese New Year, the
analyst wrote. The punishing sell-off in Caterpillars stock from its 52-week
high has made the valuation too compelling for value investors to forego. With a
forward price/earnings ratio of 10, Caterpillar trades at a 40% discount to its
own five-year average, according to data from Thomson Reuters. Its also 28%
cheaper than the S&P 500. Furthermore, on a trailing earnings basis,
Caterpillars P/E of 14 offers a 23% discount to its own five-year average and a
22% discount to the broader market. Meanwhile, Caterpillars
price/earnings-to-growth ratio (PEG) which measures how fast a stock is rising
relative to its growth prospects stands at just 0.6. Not only is that 58% below
Caterpillars own five-year average, it also represents a 75% discount to the S&P
500, according to Thomson Reuters data. With a return on equity of 35%, the
numbers dont lie: Caterpillar has all the makings of a cheap, high-quality
stock. The company has exceeded Wall Streets bottom-line forecasts in six of the
last eight quarters, and has topped revenue estimates six quarters in a row.
That helps bolster the case that analysts average price target is on the money.
Wall Streets mean (and median) price target for Caterpillar currently stands at
$114.50, according to Thomson Reuters data. Add in the 2% yield on the dividend,
and the stock offers an implied return of 28% in the next 12 months or so. Not
too shabby for a company with a market cap of more than $58 billion. If youre
screening for beaten-down blue chips with the ability to generate superior
returns in 2012,