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.

Business Services, Medical – Analysis

Case Background: Health Grades, Inc. (HGRD) and WebMD Health Corp. (WBMD) share similar business models. WebMD Health Corp. provides health information to both consumers and physicians via its web portals, most notably www.WebMD.com and www.Medscape.com. Health Grades, Inc. provides objective ratings of hospitals and nursing homes; in addition it publishes detailed information on physicians (www.HealthGrades.com). Health Grades, Inc. also provides articles and tools to physicians and other health care providers via www.ProviderWeb.net on a subscription basis. Health Grades, Inc.’s consumer clients use the detailed information to select physicians and to assess the quality of service prior to making a first visit.

WebMD Health Corp.:
WebMD Health Corp. has made several acquisitions in the past 2 years: HealthShare Technology (March 14, 2005), eMedicine.com, Inc. (January 17, 2006 - $25.5 Million), and Medsite, Inc. (September 12, 2006). HealthShare Technology provides a similar service to Health Grades, Inc., putting Health Grades, Inc. and WebMD Health Corp. in direct competition. WebMD has a P/E ratio of 360.36, one that is astronomically high. Their forward P/E is 132.48, and the stock is currently trading at $38.42. WebMD Health Corp. has a market capitalization of 2.15 Billion US Dollars. They continue to purchase smaller companies that fit their core business, which is providing information to both consumers of medical services and to physicians.

Health Grades, Inc.:
Health Grades, Inc. has continued to improve their consumer reports and to strengthen their position in the consumer medical reports sector. Prior to September 25, 2006, consumers were able to purchase, for $17.95, a report detailing location, medical school, residency/internship, positions held, fellowships, specialty, licenses, professional affiliations, disciplinary actions of medical practitioners, as well as survey results of patients. On September 25, 2006, Health Grades, Inc. issued a press release, announcing the availability of physician and hospital pricing. Consumers are charged an additional $4.00 to receive detailed information specifying how much a chosen physician charges for various operations and procedures. According to rumors on Wall Street, Google is in the planning stages of developing a healthcare-based search engine which may feature Health Grades, Inc. Currently, Health Grades, Inc. has a P/E of 50.57, with a forward P/E of 22.25, a market capitalization of 126.29 Million US Dollars, and is trading at $4.45.

Conclusion:
There are few players in this industry; which bodes well for Health Grades, Inc. Unfortunately, WebMD Health Corp. holds most of the market share. Investors looking for exposure in this sector can minimize total risk by investing in companies with lower P/E ratios. An investment in Health Grades, Inc. will allow the investor to maximize the number of shares purchased, while gaining the opportunity for future partnerships with Google, Inc. and other larger players looking to enter the marketplace.

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 (10/12/2006). This investment article was edited by http://www.proof-reading.com; copyright © 2006 PE-Ratio.com, All rights reserved.