Q. I’m pleased with my stock in Caterpillar Inc. but wonder if it can continue on its current pace. What do you think?
C.L., via the Internet
A. This famous maker of construction and agricultural equipment could have faded into memory as simply a model for children’s toys.
Instead, it is a cutting-edge worldwide company committed to strategy, diversification, and research and development. It enjoys a dominant market share in engines and equipment used in mining and construction.
To expand into the railroad industry, it recently bought Progress Rail Services Inc., a supplier of remanufactured rail products, for $800 million in cash and stock. It also purchased the rail remanufacturing business of Finning International Inc. for an undisclosed amount.
Targeting China’s potential, Caterpillar is opening a new parts-distribution center in Shanghai and has received a contract to supply methane-powered generators to a Chinese coal-mining company.
With copper, oil and gas prices soaring, Caterpillar is profiting from tremendous demand for its machinery and must overcome production bottlenecks from its heavy orders. It also intends to produce a line of electric-drive mining trucks that includes a partnership with Mitsubishi Electric to supply power semiconductors.
Caterpillar shares (CAT) are up 26 percent this year, following gains of 18 percent last year, 17 percent in 2004 and 82 percent in 2003. After a 45 percent profit rise in its recent quarter, the company boosted its earnings outlook for the year.
But this has been so much of a good thing that investors lately have wondered how long it can continue at this pace.
The stock price already reflects the positives and the company has passed along a lot of rising costs. Although few see an end in sight to good fortune in the industries it serves, they are cyclical in nature and can encounter problems such as raw-material shortages.
Because the upside potential of Caterpillar shares could be limited for a time, the consensus rating from Wall Street analysts is a “hold,” according to Thomson Financial, consisting of three “strong buys,” three “buys,” nine “holds” and one “underperform.”
Earnings are expected to increase 31 percent this year, versus the 22 percent expected for the farm and construction machinery industry. Next year’ expected 13 percent growth rate compares to 8 percent projected industrywide. The five-year annualized growth rate is forecast as 10 percent versus 12 percent for its peers.
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Andrew Leckey is a Tribune Media Services columnist. E-mail him at [email protected].