Founded in 1925, our latest featured turnaround stock is the world’s leading manufacturer of construction and mining equipment, observes George Putnam, editor of The Turnaround Letter.
Caterpillar (CAT) has been buffeted by a number of headwinds in recent years including the global recession in 2008-09 and the slow recovery in construction activities.
It has also been hurt by weakness in the Europea, and most recently, the strength of the US dollar, the slowdown in China, and the decline in mining and exploration activities.
Nevertheless, we believe that Caterpillar is well positioned to rebound strongly when these headwinds subside.
It has a great brand, powerful global presence, strong management, and a solid balance sheet.
While it is difficult to predict exactly when these negative market conditions will turn around, we are beginning to see some hopeful signs for Caterpillar.
The dollar looks like it may be returning to more normal levels and the ongoing, albeit gradual, recovery in the US economy is supporting an upturn in construction activity.
The mining and oil & gas sectors are likely to remain soft for some time as miners and producers cut back in response to lower commodity prices.
Eventually, however, as supply and demand come back into line, the market for heavy equipment in this sector will pick up again.
In the meantime, Caterpillar is focused on reducing its costs and improving efficiency. Management has consolidated global purchasing and logistics functions resulting in lower inventories of many components.
Even if it takes a while for global economic winds to shift to a more favorable direction, Caterpillar is committed to enhancing shareholder value.
Management recently raised the dividend on the stock by 10% so that it yields a generous 3.5%. And this is not likely to be a one-time event.
Caterpillar has made double-digit percentage increases in the dividend in each of the past four years and it has increased the dividend every year for 21 consecutive years.
Moreover, Caterpillar bought back $4.2 billion of its stock last year as part of an ongoing $10 billion repurchase program.
We believe that this is a good time to buy the stock of this shareholder friendly company with a great global franchise.
Although Wall Street’s short-term orientation may hold the stock price down for a while, we believe it has strong long-term potential. We recommend buying Caterpillar up to $100.
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