Caterpillar is a patience-builder

Posted Apr 15th 2009 10:00AM by Joseph Lazzaro
Filed under: Caterpillar (CAT), Stocks to Buy

If you already own the stock, Caterpillar (NYSE: CAT) is a play that's likely to test the patience of most investors.

In general, analysts expect CAT to post lower earnings per share through the first half of 2009, then recover in the second half, as various international markets start to recover.

But there are qualifiers: Shares could take a hit if there's any sign that the U.S.'s pronounced recession is not about to end by Q4. Internationally, shares currently discount recoveries in the heavy construction, energy, and mining sectors: signs of headwinds in these sectors would easily send CAT's shares back to the $20-25 range. The First Call F2009 / F2010 EPS estimates for CAT are $1.96 / $2.08.

Hence, Caterpillar is not for the squeamish, so if you can't handle a 20-30% sell-off on unexpected choppiness, avoid CAT. If, however, you can tolerate moderate risk and seek a stock capable of doubling in 12-18 months, CAT is for you.

Stock Analysis: Caterpillar is a moderate-risk stock. Consider buying a 25% position in CAT now; then buy another 25% in three months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your CAT position in the first half of 2009. Sell / Stop Loss if you were to buy shares in this company: $17.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: CAT, construction, infrastructure