At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.
So perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.
Goldman goes "boo!" (Did I scare ya?)
On Halloween 2011, the world's 7 billionth baby was born. It was a "happy birthday" moment for two lucky parents, but here in the U.S., it sparked a bit of a panic about how we're going to provide for all these new mouths to feed. How we're going to grow the cotton to cloth them, raise the grain to feed 'em, find the oil to keep them warm, and build the houses to keep the rain off. One analyst thinks it's found the solution: Caterpillar (NYS: CAT) .
Naming Caterpillar a "conviction buy" yesterday, the analysts at Goldman Sachs argued that there's no company better positioned to benefit from a growing global population as we face "declining ... quality" in the resources needed to keep that population fed, clothed, and sheltered. As we use up the easy-to-get-at oil, coal, iron ore, and so on, it becomes more necessary to purchase heavy equipment to root out the harder-to-get-at stuff. And Caterpillar just happens to make the requisite equipment.
This glorious match-up of what Caterpillar supplies with what the world demands, says Goldman, is going to lead to better profit margins for Cat in 2012, and a stock price that could hit $118 within a year's time -- 23% higher than where the shares sat yesterday. Is it right?
Let's go to the tape
If history is any guide at all, Goldman is almost certainly right about Caterpillar today. We've been watching this analyst's performance for several years now, Fools, and although Goldman is far from perfect in many respects, one thing I will give it: This analyst is pretty darn good at picking machinery stocks:
Goldman's Picks Beating (Lagging) S&P by
Cummins (NYS: CMI)
Joy Global (NAS: JOYG)
AGCO (NAS: AGCO)
20 points (picked twice)
In recent quarters, Goldman's machinery recommendations have been beating out the S&P 500 performance about twice as often as not, and longer term, this analyst's record isn't too shabby, either. Over the several years we've been tracking its performance, Goldman has racked up a record of 59% accuracy on its picks in this industry, outperforming the market by about 8 points per pick.
Call me an optimist, call me a Fool -- but I think Goldman's about to beat the market again.
This Cat looks rather foxy
Consider: Most analysts on Wall Street agree that Caterpillar will grow its profits at 23% per year or better over the next five years. (For the record, Goldman thinks they'll grow faster than that in 2012.) Yet the stock costs only 15 times earnings today, which seems a pretty sizeable discount to the growth rate.
True, Caterpillar doesn't currently generate quite as much free cash flow as its reported GAAP earnings number. But that's not unusual in this industry. In fact, Cummins -- one of Goldman's best performers to date -- also falls down in the free-cash-flow department, and rivals CNH Global (NYS: CNH) and Deere (NYS: DE) don't fare any better. In fact, with the $4.2 billion that Cat did generate over the past year falling within a (cat's) whisker of the $4.3 billion claimed on the company's income statement, Cat does a lot better in this category than the competition.
That's close enough for government work, and close enough for value investors like me. On the other hand, if you're a dividend seeker, you'll be pleased to learn that Caterpillar also pays a tidy 1.9% dividend annually, which should help bridge the gap between FCF and GAAP valuation.
Over the past year, Caterpillar has already outperformed the Dow Jones Industrial Average (INDEX: ^DJI) by 10 percentage points. If you ask me, though, Cat's only getting warmed up. Expect this one to purr right along for years to come.
A bold claim, you say? Yes, it is, and I'm staking my reputation on it, too. In fact, I'm heading over to Motley Fool CAPS right now to recommend buying Caterpillar shares.Tag along if you like, and keep an eye on how the pick performs over the quarters and years to come.
At the time thisarticle was published Fool contributorRich Smithdoes not own shares of, nor is he short, any company mentioned above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 325 out of more than 180,000 members.The Motley Fool owns shares of Joy Global.Motley Fool newsletter serviceshave recommended buying shares of Cummins. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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