Now down nearly 30% from an all-time high it achieved in early 2021, Caterpillar (NYSE:CAT) is once again becoming attractive to many investors.
The Texas-based company, which is the largest producer of construction and mining equipment in the world, has three significant factors working in its favor and making it more and more attractive to investors looking to “buy low” and “sell high.”
Factor #1 – Escalating Commodity Demand
One of the most common ways they do this is promoting electric vehicle (EV) adoption. As a result, electric vehicle production has soared.
SPGlobal.com reports that worldwide EV sales doubled to 6.6 million in 2021. In the US, 630,000 EVs were sold in 2021, twice as many as the year before.
All those electric vehicles need batteries to run on, and all those batteries need copper and lithium and cobalt and other minable materials to produce power.
Let’s look at copper as an example of what is happening. Demand for copper has skyrocketed and is expected to only go higher in the future. In fact, experts now say demand for copper-intensive technology – such as EVs, charging stations, solar panels, wind generators, batteries, and grid storage – will triple by 2035.
It will be up to miners to provide more copper and other precious commodities. And what are those miners going to need to meet the rising demand?
They are going to need equipment – which is precisely what Caterpillar (NYSE:CAT) provides.
It also doesn’t hurt that the mining machinery in use today has an average age of 11.7 years and thus may be approaching replacement. Moreover, today’s soaring commodity prices may allow miners to make those replacements more easily.
Echoing this sentiment, Kitco News recently reported that the mining industry will need to spend $81 billion annually between now and 2030 to prevent shortages and achieve net zero.
Net zero is a target where the amount of greenhouse gases produced by human activity is negated by reducing emissions and absorbing carbon dioxide from the atmosphere.
All of this is just part of why Caterpillar (NYSE:CAT) is eyeing big gains in the future. Here is another reason …
Factor #2 – Quality Products
Few companies can match the industry reputation that Caterpillar (NYSE:CAT) has built over the years.
This is a company known for consistently delivering high-quality products across its four reportable segments.
Those segments include machinery, energy, transportation, and financial products, which include financing and insurance services.
This reputation for producing high-quality products allows the company to thrive in bull markets and avoid significant losses in bear markets. Caterpillar (NYSE:CAT) has generated a 12.7% yearly return since 1985.
Factor #3 – High Free Cash Flow
As a result of its high-profit margins, Caterpillar (NYSE:CAT) can generate high free cash flow (FCF) consistently. The company’s FCF was $6.1 billion in 2021, which represents a number that was 6.6% of its market cap.
The high FCF ensures the company has plenty of money to spend on such things as dividends, debt reduction, and buybacks.
This high FCF was also why Caterpillar (NYSE:CAT) raised its dividend to $1.20 a share on June 8 – that’s an 8.1% boost and implies a 2.8% dividend yield.
The Bottom Line on Caterpillar
Combine all the factors mentioned above with that recent 30% dip in price, and Caterpillar (NYSE:CAT) begins to stand out as a potentially attractive investment opportunity.
For example, with the recent dip, it would appear that economic weakness has already been priced into the stock. Plus, as we outlined, there are some significant developments on the horizon – such as commodity demand increasing mining efforts. That growing need for mining machinery could push this stock much higher in the future.
This is a company with quality products, high margins, high free cash flow, and it is filling a definite need in the marketplace. Mining is going to need machinery from Caterpillar to meet escalating demand.
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