Caterpillar - Time to Buy?

Case Background: Caterpillar, Inc. (CAT) was founded in 1925 with the merger of Holt Manufacturing Company and C.L. Best Tractor Co. Caterpillar, Inc. is best known for its yellow Medium Wheel Loaders. However, it offers several products and services: machines, engines, generators, rental power, financial services, maintenance/support, logistics, apparel, and remanufacturing. Caterpillar, Inc. has three business divisions: Engines, Machinery, and Financial Products. Discussion: Caterpillar, Inc. announced third-quarter earnings for 2006 on October 20 and disappointed Wall Street. Caterpillar, Inc. cited a drop in new home construction as a primary reason why they missed the Thomson First Call earnings per share of a $1.35 vs. $1.14 per share. Caterpillar, Inc. has a trailing P/E ratio of 12.42, vs. a forward P/E ratio of 9.67. Sales and revenues were $10.5 billion, up 17% ($1.5 billion from the third quarter of 2005).

Conclusion:
Value investors look for low P/E ratios and strong earnings. Caterpillar, Inc. has disappointed Wall Street in the third quarter of 2006, missing Thomson First Call earnings. This could be a great time to purchase a blue chip stock at a discount. Caterpillar, Inc. offers a dividend rate of 1.2% and potential upside in the short-term future.

Disclaimer:
P/E ratios are a quick way to sort out the leaders within the same sector. Never use a P/E ratio exclusively to make an investment. Remember, a P/E is measured using historical trailing earnings for the previous 12, months, and does not necessarily indicate strong future earnings. Price/earnings ratios, when used with other market value ratios, can help investors to make consistent returns and to minimize losses. Various interpretations of a particular P/E ratio are possible:

1. 0-13 - Either the stock is undervalued or the company's earnings are thought to be in decline.
2. 14-20 - For many companies, a P/E ratio in this range may be considered fair value.
   
   • The average U.S. equity P/E ratio is usually around 14, meaning it takes about 14 years for the stock of a company to earn back the full purchase price.
   • Average P/E over the entire market is a good indicator of overall market strength.
3. 21-28 - Either the stock is overvalued or the company's earnings have increased since the last earnings figure was published.
4. 28+ - A company whose shares have a very high P/E either really does have an exceptionally rosy future or the stock may be the subject of a speculative bubble.
5. A company with no earnings has an undefined P/E ratio.
   

Financial information provided by http://finance.yahoo.com (10/24/2006). This investment article was edited by http://www.proof-reading.com; copyright © 2006 PE-Ratio.com, All rights reserved.