In my ongoing quest to find undervalued dividend growth stocks I have focused recently on two industrial companies that manufacture and distribute heavy machinery: Cummins (CMI) and Caterpillar (CAT). Cummins designs and produces diesel and natural gas engines, as well as various engine-related components. Caterpillar also builds engines, but it has a more diverse product array that includes construction/mining machines and industrial gas turbines.
The purpose of this post is to organize, compare, and share some of the quantitative information I have compiled on the two companies. It is intended to be a quick, side-by-side numerical snapshot rather than a comprehensive analysis. I will start with some stock price information (as of October 2):
Summary and Conclusions: This purely quantitative comparison shows that CMI and CAT are similar in many respects, the main one being that both stocks are undervalued. Using a Dividend Discount Model with a 10% dividend growth rate and 12% discount rate, I get a fair value of $110 for CMI and $114 for CAT. These values imply there is a margin of safety of at least 15% at current prices.
Even though I did not show any historical trend data, both companies recovered quickly from the recession and seem to be doing well. However, CAT recently lowered its guidance out to 2015, which may hint at some future earnings instability (CMI reduced its short-term guidance earlier this year). Despite near-term economic pressures, I think both companies would represent suitable long-term investments, especially when worldwide economic growth picks up.
That said, if I were to choose just one of them as an investment, then I would probably go with CMI. From a quantitative perspective, I like its strong balance sheet and recent dividend growth. From a qualitative perspective, I like the company's leadership in developing better engine technology that meets stricter emission standards. The increasing use of natural gas as a fuel source should also benefit the company. For these reasons, I am considering CMI as a potential addition to my portfolio.