Caterpillar is going higher

Caterpillar Inc., the world leader in manufacturing, is traded on NYSE under the symbol of CAT and in my opinion currently it is a BUY.

The company was founded as Caterpillar Tractor Co. in 1925 and was renamed as Caterpillar, Inc. in 1986. Caterpillar Inc. primarily designs, manufactures, and sells machines and engines for various applications such as marine, petroleum, construction, industrial and agricultural.

Fundamentally, Caterpillar Inc. is very sound. In FY 2006 its sales were up by 14% and operating profit soared by 30%, compared to FY 2005. Caterpillar Inc. has consistently delivered a good return on equity (ROE), which means that the Caterpillar management is very efficient in the way it conducts its business. Its ROE has consistently exceeded the industrial average and the S&P 500 average. For Q4 2006, Caterpillar's ROE was approximately 51% while the industry’s ROE was 23% and the S&P 500 ROE was 16%. Also, Caterpillar is growing faster than the rest of the industry. Compared to Q4 2005, in Q4 2006 its sales were up by 13% compared to the industrial average of 10%. Also, I believe CAT is currently undervalued with a PE ratio of 13, which is less than the industrial average of 17. Furthermore, on 02/15/2007 Caterpillar Inc. announced a stock buyback plan worth 7.5 billion USD. This is very good news for investors, because it means lower number of total shares outstanding and thus greater earnings per share.

Other than strong fundamentals, there is one more thing I like about CAT. Caterpillar’s business has a global presence. Other than United States and Canada, Caterpillar has penetrated various developing markets such as Africa, Middle East, Brazil, China, India and Indonesia. Though the 2007 outlook in North America (US and Canada) is not as bright as 2006 with sales expected to decrease by 8%, overall the year of 2007 looks good for Caterpillar Inc., because much of the increase in sales will come from outside United States. Also, Caterpillar's exposure to the US housing sector has scared away many investors in 2006, but the housing market is expected to get better in the second half of 2007 and this will provide an additional lift to the Caterpillar's business.

Another good thing going for Caterpillar Inc. is the strong commodity market for metals, oil, natural gas and agricultural products. Jim Rogers, the world's most successful commodity investor believes that currently the supply and demand for commodities is very unbalanced, with the demand exceeding the supply. Thus, we are in the middle of a commodity bull market and one way to benefit from this is by investing in companies aiding the commodity business such as Caterpillar Inc.

Bottom line, Caterpillar Inc. is the best in the breed and undervalued. It should benefit from the strong commodity market and its global presence. In my opinion, CAT's a BUY.