Monday, October 23, 2006

Quick Thought

I think that after getting slammed, Caterpillar (CAT) is looking quite attractive. I think if somehow the market trades it down to the $50-55, then it'd be a steal, and you should really load up.

Anyway, the company missed its earnings for a number of reasons, including production issues and legal issues. And, the company reduced its profit forecasts for 2006 from a range of $5.25 - 5.50 down to $5.05 - 5.30 a share. The company also hinted that double digit growth would be unlikely, and that investors should expect mid to low single digit growth.

Let's assume that earnings come in at the low-end of their range for '06 at $5.05. That would mean that at $60 a share, CAT would be trading below a 12x multiple. I think that's a very pessimistic outlook. Say it came at $5.05, but instead of no earnings growth, they see a modest 4% increase. That would put next year's earnings at $5.25, and once again, using a price of $60 per share, CAT would be trading at under 11.5x forward earnings. I think Wall Street has overreacted, and I think it's time to take a good look at the company.

CAT's a strong company, and there is serious upside potential if they do better than their low-end estimates. Also consider that, historically, their management tends to be conservative with estimates. In any case, I'll be waiting for it to come down a bit more. I will probably sell part of the First Marblehead (FMD) shares to fund this purchase, if an opportunity to purchase shares materializes. I'm going to start nibbling at $58 or better, and I'm prepared to add heavily to the position if it ever does see $55 or less.

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