Tags: DavidNFrazier | Caterpillar | Stock | Investment

David N. Frazier: Caterpillar Poised to Move Higher on Global Economic Recovery

By    |   Sunday, 06 April 2014 11:59 AM

After trading in a sideways basing range for the past 21 months, Caterpillar (CAT) seems poised to break out to an all-time high within the next couple of months and to continue to trend higher through at least the end of 2015.

Caterpillar is the world’s largest maker of earth-moving machines, with worldwide sales of $52.6 billion during 2013.

Although the Peoria, Illinois company’s net profit declined last year by 33 percent, on a 15.5 percent decline in sales, I expect Caterpillar’s revenues and earnings to increase considerably between now and the end of 2015. That forecast is based, primarily, on indications that economic conditions in most regions of the world will improve substantially during the next 12 to 18 months.

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For example, the Institute of Supply Management recently announced that manufacturing activity in the United States rose during March for the 10th consecutive month. Meanwhile, Markit Economics reported that manufacturing activity in Brazil expanded during March for the fourth consecutive month. Markit also reported recently that manufacturing activity rose during March for the 13th consecutive month in Japan and for the 9th consecutive month in the eurozone.

Commenting on the eurozone’s manufacturing activity, Markit’s Chief Economist said on April 3, “The final PMI data [Purchasing Managers’ Index for Manufacturing activity] for March round off the region’s best quarter for three years, with the survey data signaling that the [eurozone] economy grew by 0.5 percent compared to the fourth quarter. The surveys also confirm that the recovery is broad-based.”

Those reports are very significant because manufacturing activity has, historically, served as a very reliable leading economic indicator, meaning that the pace of economic growth in any given country tends to increase following increases in manufacturing activity.

In regard to a few other leading economic indicators, the Department of Commerce announced on March 26 that new orders for durable goods rebounded during February, after falling during the prior month, as the harsh cold weather experienced in many regions of the United States subsided. The Commerce Department announced that construction spending in the United States rose during March, on a year-over-year basis, for the 32nd consecutive month.

Separately, the CESifo Group, a European economic research firm, reported recently that business conditions in the eurozone continued to improve and that the economic expectations of European businesses rose during March for the 15th consecutive month.

Lastly, the Conference Board announced on March 20 that its index of leading economic indicators (“LEI”) for the United States continued to trend higher during February, the latest month for which data is available. Commenting on February’s LEI, the Conference Board’s Economist said, “The U.S. LEI increased sharply in February, suggesting that any weather-related volatility will be short lived and the economy should continue to improve into the second half of the year.”

That announcement follows similar reports from the Conference Board, with its index of leading economic indicators for the eurozone and China also rising during February.

Meanwhile, the Department of Labor announced that 197,000 jobs were created, on a seasonally-adjusted basis, during February versus only 175,000 that the Labor Department estimated earlier, and that 192,000 jobs were created during March. That’s substantially more jobs that were created during December and January.

Separately, the National Federation of Independent Business reported on April 2 that small-business owners also created more jobs during March. That’s a very significant development because studies have shown that small business create approximately 65 percent of all new jobs in the United States in any given year.

The factors and developments mentioned above are important because Caterpillar is, essentially, a macroeconomic play, meaning that Caterpillar’s revenues and earnings, as well as the company’s stock price, are very responsive to changes in the worldwide economy – when global economic conditions improve, Caterpillar’s revenues, earnings and stock price tend to rise.

Although the company stated in a press release issued on Jan. 27 that it expects its revenues for the year ending Dec. 31, 2014 “to be similar to 2013 – about $56 billion in a range of plus or minus 5 percent”, and for its net earnings per to decline to $5.30 per diluted share, from $5.75 per diluted share for the year ended Dec. 31, 2013, Caterpillar has, historically, been very conservative in its revenue and earnings projections.

In light of the fact that the company plans to reduce its operating expenses substantially this year and that it plans to continue to repurchase large shares of its publicly-traded stock, my analysis indicates that instead of the Caterpillar’s earnings per diluted share declining to $5.30 that its earnings will rise to over $6.00 per diluted share.

With both myself and Wall Street analysts estimating that Caterpillar will grow its earnings at an average annual rate of around 15 percent during the next three years, my analysis indicates that financial market participants are undervaluing the company’s stock.

Therefore, I encourage long-term investors and stock market speculators to allocate a portion of their financial market assets to Caterpillar at prices up to $105. Caterpillar stock fell 38 cents to close at $102.17 Friday in NYSE trading.

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David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.

In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.

David now serves as the president and chief market strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.

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After trading in a sideways basing range for the past 21 months, Caterpillar (CAT) seems poised to break out to an all-time high within the next couple of months and to continue to trend higher through at least the end of 2015.
Sunday, 06 April 2014 11:59 AM
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