Better Buy: Caterpillar Inc. vs. Deere

By Markets

The construction business has gone through considerable turmoil in recent years, and heavy-machinery specialists Caterpillar (NYSE: CAT) and Deere (NYSE: DE) had to weather the storm in falling demand for their equipment. Yet over the past year, both companies have seen some relief as their share prices have bounced higher, suggesting that the worst might finally be over for the two companies. With that as an investing thesis, smart investors want to know which one has the more attractive prospects. Let's look more closely at how Caterpillar and Deere compare on some key metrics to see which deserves more of your attention.

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Image source: John Deere.

Valuation and stock performance

Both Caterpillar and Deere have clawed back a good chunk of their lost ground from past years. Caterpillar's gains have been more impressive, picking up almost 30% since October 2015. But Deere's rise of 11% over the same time period has also been enough to recover from the worst of its share-price declines.

By some measures, the big gains in the two stocks have almost gotten ahead of their earnings recoveries. When you look at actual earnings over the past 12 months, Caterpillar sports a sky-high valuation of almost 60 times trailing earnings, compared to a trailing earnings multiple of just 18 for Deere. Yet those trailing results include some one-time items that aren't likely to recur. When you incorporate forward-looking profit expectations, Caterpillar's forward earnings multiple of 25 and Deere's corresponding figure of 23 look a lot closer to each other. Given how close those numbers are, it's hard to give Deere much more than a very slight edge over Caterpillar in terms of valuation.


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For income investors, Caterpillar has a more attractive dividend yield than Deere. Caterpillar's current figure of 3.5% tops Deere's 2.7% by a considerable margin, although both pay well above the stock market average.

Even more impressive is Caterpillar's 22-year streak of raising the amount it pays in annual dividends every year. The equipment maker hasn't boosted its dividend since mid-2015, but because of the timing of its increases, Caterpillar will already pay more in 2016 than it did last year and therefore will extend its streak this year. Deere, however, has kept its dividend constant since 2014, and it would take a last-minute increase in 2016 to keep its 12-year streak alive. All in all, Caterpillar has a slight edge with regard to dividends.

Growth prospects and risks

Both Caterpillar and Deere have had to overcome adversity to get their share prices to rise recently. For Caterpillar, the company continued to post declines in all three of its main business segments, with the worst hit coming to its resource industries division. Earnings fell by almost 30% compared to the year-ago quarter, and poor performance across all of Caterpillar's geographical regions pointed to continued pressure on the company's fundamentals. Still, bullish investors hope that rebounds in oil prices along with some key commodities in the precious metals and base metals complexes could spur reinvestment in Caterpillar machinery, helping to bring about a turnaround in its business that would mirror what the stock has already seen.

Meanwhile, Deere has shown considerable signs of life. Although net income fell in its most recent quarter compared to the year-ago period, a dramatic drop in share count actually boosted earnings-per-share figures. Lower production costs and overhead expenses also contributed positively to the bottom line, and Deere boosted its full-year 2016 outlook by an eighth to $1.35 billion. Even though Deere expects farm-equipment sales to continue to decline, the moves that the company has taken to become more efficient and boost its profit margin figures points toward a potentially successful future for the company.

Overall, Deere appears to have a slight advantage over Caterpillar right now. Caterpillar's bigger share-price advance anticipates a successful turnaround that might not come to pass. Deere appears to have a greater margin of safety if conditions remain tough longer than expected, and that gives investors better returns going forward from here.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool is short John Deere. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.