Upside Potential in Basic Industrial Stocks (CAT, DD, DOW, DE, APD, EMR)

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While global GDP growth is expected to be slower this year, there are a couple of areas where investment will probably continue at relatively high levels. These are mining and agriculture. New mines continue to be developed — at great cost — and the global demand for food leads to a greater demand for the machinery and chemicals that are used to produce that food.

With that in mind, we’ve looked at several companies involved in basic industries like heavy equipment, chemicals, and electrical components to try to determine if there are any value plays available to investors. The companies we examined were Caterpillar Inc. (NYSE: CAT), E.I. du Pont de Nemours & Co. (NYSE: DD), The Dow Chemical Co. (NYSE: DOW), Deere & Co. (NYSE: DE), Air Products and Chemicals Inc. (NYSE: APD), and Emerson Electric Co. (NYSE: EMR).

Caterpillar Inc. (NYSE: CAT) has a consensus target price of $131.61. At a current price this morning of $116.00, the company’s implied gain is 13.5%. Since the beginning of the year, the stock has gained more than 28%, with a 12-month share price gain of nearly 15.5%. The company’s forward P/E ratio is 10.23 and Caterpillar pays a dividend yield of 1.6%. The world’s largest maker of construction and farming machinery expects to grow EPS by 25% year-over-year in 2012 to about $9.25 and to double to as much as $20/share by 2015. Given Cat’s past success, none of this is out of reach.

E.I. du Pont de Nemours & Co. (NYSE: DD), or DuPont, has a consensus price target of $56.47. At its current price of $51.29, Dupont’s implied gain is 10%. Year-to-date shares are up about 12%, but for the preceding 12 months, the company’s stock is down more than -3%. The company’s forward P/E ratio is 10.68 and DuPont pays a dividend yield of 3.2%. DuPont is auctioning its car paint business and could reap as much as $4 billion at the time of sale. The company has struck some recent deals with Chinese solar panel makers and DuPont expects to continue increasing its sales in the agriculture, alternative energy, and other high-value markets.

The Dow Chemical Co. (NYSE: DOW) has a consensus target price of $36.92. At a current price of $34.07, the potential upside is 8.4%. Dow shares have lost about -4% in the past 12 months, though since January shares have risen more than 18%. The company’s forward P/E ratio is 9.96 and Dow pays a dividend yield of 3.0%. Like other chemical companies, Dow is getting a nice benefit from low natural gas prices. The company expects 2012 growth in all its operating divisions, with agriculture and plastics leading the gains.

Deere & Co. (NYSE: DE) has a consensus target price of $94.59. At the current price of $83.84, the implied gain is 12.8%. For the past 12 months, the stock has dropped -5.6% though shares are up about 8.5% in the new year. The company’s forward P/E ratio is 10.01 and Deere pays a dividend yield of 1.90%. In the company’s most recent quarter, EPS beat estimates, but sales were a little slower than investors had hoped for. At less than half the market cap of Caterpillar, Deere’s long-term debt is also less than half Cat’s. That gives it some flexibility, and allowed the company to offer $1 billion in 5- and 10-year notes earlier this week at coupons of 1.4% and 2.75%, respectively.

Air Products and Chemicals Inc. (NYSE: APD) has a consensus target price of $100.60. At the current share price of $92.20, the potential upside is 9%. The company’s shares posted a slight gain of 1.4% in the past 12 months, and are up more than 8% since the beginning of the year. The company’s forward P/E ratio is 13.68 and Air Products pays a dividend yield of 2.60%. One of S&P’s Dividend Aristocrats, Air Products had only a so-so quarter and doesn’t expect a lot of improvement until the second half of this year.

Emerson Electric Co. (NYSE: EMR) has a consensus target price of $56.42. At the current share price of $50.90, the potential upside for the stock is 10.8%. Emerson’s shares have lost about -14% in the past 12 months, but are up more than 9% year-to-date. The company’s forward P/E ratio is 12.80 and Emerson pays a dividend yield of 3.10%. Another of S&P’s Dividend Aristocrats, Emerson had a sub-par first fiscal quarter, but is expecting to resume sales growth both in its networking and its climate products business as bandwidth demand grows in the US and new housing construction ticks up.

Between the two equipment makers, Caterpillar has performed better over the past year and really shows no signs of pulling back. Among the chemical companies, there is no clear choice and all are pretty fully valued at this point. The make-or-break for these companies will be natural gas prices, which should rise as production of gas is cut back. Emerson is counting on a continued buildout of wireless networks and a rise in home and office building construction. Overall, Caterpillar seems to be the best choice.

Paul Ausick

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