Caterpillar: "A Screaming Discount"

04/11/2017 2:50 am EST

Focus: INDUSTRIALS

Jim Powell

Principal Analyst, Global Changes & Opportunities

I love it when a top company that I have been buying runs into what I am certain is short-term trouble and gives me a chance to get more at a discount, observes Jim Powell, editor of Global Changes & Opportunities Report.

That’s happening today with Caterpillar (CAT), a company that’s positioned to profit from the infrastructure rebuilding trend that is ramping up in the US – and in many other countries.

Caterpillar, as I’m sure you know, is a world-class construction equipment company. I first recommended the stock in June 2016 GCOR at $72.27. CAT subsequently rose to $99.46 — and was still in an uptrend.

However, on March 8 the federal government raided Caterpillar’s offices at Peoria, IL to serve papers and seize records. At issue was $7.6 billion in offshore profits the company brought home without sending Washington its share.

The company insists that its actions were legal. Investors were in no mood for the tax controversy and promptly sold Caterpillar off.

Today, CAT is $92.51. Although that’s not a screaming discount, for a company with such good long-term potential, it’s an opportunity that we should not ignore.

I don’t know what the outcome will be for CAT’s dispute with Washington, or how long it will take to resolve. Even if the taxes are imposed, they will have a small impact on the company’s long-term performance.

In any event, Mr. Trump has promised to slash taxes on repatriated offshore profits and may ask Congress to make the new rates retroactive through 2016.

There is an even more important matter in CAT’s favor that is not getting much attention. A large portion of Mr. Trump’s proposed $54 billion defense spending increase will be for civilian infrastructure projects that improve the nation’s security.

Just as President Eisenhower pushed the intrastate freeway system in large part to facilitate troop and equipment movements in case of war, today’s proposed highway improvements will have the same dual civil/military purpose. Ditto for the proposed upgrades to our ports and airports.

Caterpillar, is ideally positioned to benefit from the multi-billion dollar infrastructure/defense projects that are on the way. I like CAT’s price, its attractive 3.23% dividend, and its outlook.

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