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Caterpillar Inc. Message Board

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  • fearthemerc fearthemerc Dec 17, 2010 2:06 PM Flag

    Cat overvalued; most definitely

    I'd be nervous shorting a stock that is in an uptrend.

    But if I were a long term investor, I would absolutely wait for a pull back before buying in.

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    • It's not as simple as saying "a stock is in an uptrend".

      Eventually that uptrend ends. And you can use valution metrics to help determine how close we are to that end.

      Start with a basic valution metric of p/e. And for a company like Cat, a p/e below 10 is a screaming buy. A p/e above 20 is a sell (or consider selling).

      Of course, you have to take earnings forecast into account to get future p/e.

      Well, earnings are predicted to double (and I believe they will) by end of 2012. So the future p/e of Cat, with a current price of $92 comes to about 15. That smacks right in the middle of the fair valuation range.

      But that is nearly 2 years from now.

      To me, that says the uptrend is nearing an end, and that possible "blow off top" could be right near that top.

      I certainly wouldn't want to wait until that blow off top became defined, because by then it is too late to short.

      • 3 Replies to gj0084
      • It is simple gj, as long as they can show future growth, the stock will be in an uptrend.

      • yeah it is that simple. you can't pick the top, nobody can.

      • You're a long term investor who has just shown that $92 is a great value price for a long-term position. And yet this is a screaming short? You're playing the timing game and you will get burned. If your horizon goes out to 2012 comfortably, why are wasting time fretting over he next two months? Buy on the dips, double down if it pulls back, and reinvest your dividends. We have not yet seen the full potential of the EMD or the German engine manufacturer acquisitions on earnings, and will have yet to see the overall impact of Bucyrus. These will not have a negative effect on the company. Book value, revenue, and profit will increase. Their book value is set to increase with all the new plants they are constructing, which will also in turn boost revenue and profit.

        Estimates for 2012 are currently an EPS of 7.45 (as per Etrade). That is forward P/E of 12.34 on a share price of 92 currently. This is up by .10 in the last 3 weeks alone. If they come through with EPS of $8 or higher, the forward P/E at 92 will be closer to 10. Not the 15 you tout. Forward P/E of 10-13, with the realization that full year P/E be end of 2012 could be 20 or higher, makes CAT potentially worth $150-170 by that time. This is on the basis of P/E levels remaining relatively normal. Even if it comes up short, say P/E 15 - 18, that still puts it between $120-144 by end of 2012. Add to that the reinvested dividends and looking at a minimum 35% return by the end of 2012.

        I'm not going to lose sleep at night fretting over the next two months when I'm looking at the end of the next two years, and even longer if things keep getting better.

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