The 3 Best Construction Stocks To Own Forever

Caterpillar showed strength during the Great Recession despite an enormous reduction in revenue in 2009. In the years after that, however, revenue grew at very high rates as pent up demand for construction and heavy equipment drove outsized gains for Caterpillar.

Importantly, Caterpillar remained profitable during the worst of the recession and not only did it maintain its dividend, but it actually kept its streak of increases alive, a streak that continues through today. Despite a huge reduction in global infrastructure spending during the Great Recession, Caterpillar remained profitable and kept shareholders a priority with the dividend.

Caterpillar - Global Infrastructure Growth Potential

Source: Investor conference presentation, page 5

This slide from a recent investor presentation shows how Caterpillar is leveraged to long-term growth potential globally, specifically related to infrastructure. The company competes in the major industries that will be able to take advantage of an ever-higher world population total, including increased urbanization and energy usage. This need for constant infrastructure investment is key to the bull thesis for Caterpillar and the outlook globally for the long-term is robust.

We see strong total return prospects for Caterpillar given that it is poised to continue to produce meaningful earnings growth, its yield is solid at 2.8%, and its valuation is quite low. After the Great Recession, Caterpillar shed a huge amount of overhead expenditures in order to downsize for its lower revenue amounts. That lean operating model continues through today, meaning that revenue increases that do accrue tend to produce operating leverage.

In addition, the valuation is down to just 9 times next year’s earnings estimates against our fair value estimate of 15.5. That implies a low double-digit annual tailwind from a rising valuation alone. We see these factors as combining to drive nearly 20% annual total returns in the coming years.

Construction Stock #3:  Deere & Company (DE)

Our third and final pick, Deere & Co. (DE), is a manufacturer of heavy equipment used in agriculture, forestry, turf care, and construction. The company also fairly recently solidified its dominant position in road construction and maintenance with its acquisition of Wirtgen. Deere produces about $36 billion in annual revenue and has a market capitalization of $48 billion.

While Deere is similar to Caterpillar, the former held up much better during the Great Recession. Indeed, Deere saw a roughly one-quarter reduction in revenue in 2009, but very quickly rebounded in 2010. In addition, while earnings fell in 2009 on lower revenue, they also quickly moved higher the following year. And just like Caterpillar, Deere managed to raise its dividend every year before, during and after the Great Recession. Deere’s strength, even in times of great economic duress, is certainly a selling point for long-term investors.

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