Do It Yourself Stock Investor

Saturday Night RORC: Caterpillar, Inc.

May 28, 2016

Caterpillar, Inc. (NYSE: CAT) and Deere & Company (NYSE: DE) compete in the Farm and Construction Industry. At the start of this season I have had the pleasure to observe both products in action.

A test drive event for a new CAT C18 articulated truck would be a more exciting ride than a Tesla Model 3. None of that popular branding action occurs for this space, but like Elon Musk, they do partner with NASA.

With the doom and gloom market, CAT had received many cautious ratings. Hindsight being 20/20, the big dip in January around mid $50s PPS would have been a great entry point.

FinViz chart of Caterpillar, Inc stock

The dividend yield for Caterpillar, Inc. is an attractive 4.24%. Yet it trades at a higher valuation of 34.67 P/E than Deere & Company at 14.78 P/E. Deere's dividend yield is nearly 3% and they recently maintained their distribution of $0.60 per share. For more on CAT's dividend and valuation read the recent article by Dividend Drive.

Research and Development

CAT produces new inventions and maintains an elite group of engineers. They have over 16,000 active patents and Research and Development (R&D) centers around the globe. CAT fosters student competitions, conducts talent searches amongst graduating engineers and has an eye for Roboteers.

At the end of 2013 CAT launched its versatile C-Series, 725C and 730C articulated trucks. On April 11, 2016 Caterpillar, Inc. issued several R&D updates:

"Three new pavers, AP300F, AP355F and AP555F, are built with intuitive, accessible technology and a quick-heating screed system that increases productivity and reduces idle time." - CAT Press Release

New CAT product, Paver AP555F

The forward looking project of construction in Cuba's harbor is a catalyst to likely use R&D spending.

Return on Research Capital

The Return on Research Capital (RORC) metric looks at the R&D spending for a company and makes a correlation with the gross revenue for the following year. The following chart shows the RORC for Caterpillar, Inc. and Deere & Company over a range for three years.

Return on Research Capital for Caterpillar and Deere

For every dollar of R&D spent by Caterpillar, Inc. in 2014 they made $22.02 in gross revenue for 2015. Deere & Company showed a RORC of $19.58. Both companies showed a decline in their RORC from 2014 and Deere proved to have a three year downward trend.


Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.