The Rising Influence of Rising Affluence

[DewDiligence]

CAT vs DE: Which is the better value?

Although both stocks have had a great run and were up nicely today on the likelihood of appreciation of China’s currency (#msg-51498072), I’m considerably more skeptical of CAT’s prospects than of DE’s.

For CAT to hit its aggressive EPS guidance during the next two years, sales of excavators, tractors, and backhoes to China must keep growing at an impressive clip. If the market for Chinese real estate turns into a burst bubble, the demand for CAT’s machines would be adversely affected to a material degree.

In contrast to the above, for DE to continue putting up great numbers merely requires that farmers in various countries keep planting their crops and that credit markets allow farmers to finance the payments for new machinery on reasonable terms. Other than the US (the world’s largest agriculture producer), there is no individual country on which DE is strongly dependent.

I would rather bet on continued crop planting powering DE than on continued infrastructure spending in China powering CAT.

Moreover, there are other reasons to be skeptical of CAT: The incoming CEO (who takes over in ten days) sold $1M worth of stock at $51-52 a few months ago, and other insiders sold large amounts at the same time (#msg-46432715).

In summary, I prefer DE to CAT as a core holding in the heavy machinery sector. If anyone disagrees, please post!

p.s. #msg-50500810, #msg-50939639, and #msg-50503427 have info on DE’s results for the fiscal quarter ending Apr 2010.