The tractors are running

These 2 blue-chip companies are trading at a discount ... but not for long.

By MoneyShow.com May 9, 2013 11:44AM

Construction © Photodisc Green Getty ImagesBy John Buckingham, The Prudent Speculator


We are confident that our eclectic style of income-focused, diversified value investing will continue to prove its worth, just as it has for the last 36 years. We will always target inexpensive stocks, pursuing bargains wherever they may reside.


Here's a look at two of our latest featured stock recommendations: Caterpillar (CAT) and Deere (DE).


Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives.


Caterpillar has a dominant share in the U.S. market and is making headway in emerging economies such as China, India, Africa, and the Middle East. Caterpillar's extensive dealer network and reputation for quality products provide a key competitive advantages over rivals.


While the near-term outlook remains variable, due to concerns about its leverage to the mining sector, we like that management remains focused on controlling what it can, such as operating efficiencies, business plan execution, and aftermarket sales and services. Additionally, we see longer-term benefits from continuing to migrate production to lower-cost countries.


Caterpillar's solid free cash flow generation supports its capital allocation strategies, which starts with maintaining its 'A' credit rating. This is followed by investing in growth, steadily growing the dividend, repurchasing shares, and funding the long-term pension plan. Caterpillar shares are attractively valued and currently yield 2.4%.


Meanwhile, Deere is the largest manufacturer and distributor of agricultural equipment worldwide, with leading market share in large farm-equipment segments.


Deere's three main areas of operation are: Agriculture and Turf (farm equipment, lawn and garden, other outdoor products), Construction and Forestry (construction, earth-moving, material-handling, and timber-harvesting equipment), and Credit (financing).


We believe that Deere is the best of the best in the agriculture universe. We also believe that demand for ag equipment is likely to remain at high levels, due to relatively high crop prices.


Deere continues to see strong demand trends for large farm equipment in the U.S., Canada, and Brazil, and we believe strength will build in emerging economies. Deere normally generates solid cash flow from operations, and it is worth noting that management has returned 60% of this cash flow to shareholders.


We believe that Deere will continue to increase its dividend (the yield is 2.4%) and buy back shares as its businesses continue to strengthen. Deere shares currently trade for less than 10 times forward earnings projections.


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