Caterpillar: Low-Risk Play on Heavy Equipment

12/04/2020 5:00 am EST


Martin Fridson, CFA

Publisher, Income Securities Investor

Caterpillar, Inc. (CAT) is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial turbines, and diesel-electric locomotives, explains Marty Fridson, editor Forbes/Fridson Income Securities Investor.

CAT operates principally through three primary business segments – Construction Industries, Resource Industries, and Energy & Transportation.

The company also provides financing for the purchase of its products through its captive finance arm, Caterpillar or CAT Financial.

With the COVID-19 pandemic, Caterpillar remains vulnerable to shifts in market sentiment, given unprecedented operating conditions and the threat of the pandemic undergoing further spikes into 2021.

However, we expect Caterpillar to manage market and economic dislocations. The company’s senior credit ratings in the ‘A’ category reflect the firm's leading market position. The financial flexibility of Caterpillar and its finance subsidiary remains strong.

The company reported 2Q 2020 adjusted operating earnings of $906 million or $1.03 per share, on sales and revenues of $10 billion, easily topping analysts’ $0.66 estimates. Operating results, however, were down considerably from a year earlier, on the heels of the pandemic.

Caterpillar has continued to take actions to reduce costs and prioritize its spending. Nonetheless, the company’s financial results for the remainder of this year and into 2021, will likely be affected by global economic uncertainty and weaker demand for CAT’s products.

This investment is suitable for low-risk taxable portfolios seeking long-term growth. The dividend distributions are qualified and taxed at the 15%-20% rate. Buy up to $170.00 for a 2.42% annualized yield.

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