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September 6, 2006
CAT Lands On Its Feet. One Life Left?

For only the second time this year Caterpillar gained more than 3% in a single session yesterday.  The rally was in response to an unexpected announcement from the company that it will raise prices in January.  CAT shares are now trading back above their 200-DMA – the eight successful test since 2000.


From a purely momentum/technical perspective, Caterpillar could certainly attract investor attention in the coming sessions. However, this doesn’t necessarily mean that CAT is a safe investment.  The likelihood of a sustainable rally in CAT runs contrary to the developing slow down in the global economy. Quite frankly, there is going to come a day – probably within the next 6-12 months – when CAT is no longer adding a billion to its bottom line every year.

Yes CAT’s rear view mirror is as alluring as ever and another dividend hike could, potentially, help build a temporary floor in the company’s stock price.  But a couple of worrisome thoughts are difficult to ignore: paying 7.3 times tangible book for any company that has a dividend yield 1.7% and a PEG ratio above 1 is dangerous.  CAT isn’t just any company you say? That’s right - it is, historically, a cyclical company.

Those that think we are in the late stages of a business cycle raise your hand.  If you are clicking buy on CAT and your hand is up in the air, you just bought into the soft landing and 9-lives fables…

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