The home-grown blue chip way to play emerging markets

For investors looking for exposure to emerging market growth through a blue chip American company on the Dow Jones Industrial Average, Caterpillar (CAT, quote) beckons like a sultry mistress garbed in yellow steel and hydraulics.

Caterpillar stock is a great way to play emerging market growth

For a blue chip stock, Caterpillar is very volatile with a beta of 1.84 (bearing in mind the beta for the stock market as a whole is 1). That means Caterpillar is almost twice as volatile as the stock market as a whole.

This results from Caterpillar being bought and sold whenever economic news is released – in particular regarding growth in China, where the company is very active.

It also presents an opportunity for investors to accumulate holdings of the world’s largest heavy equipment manufacturer at a discount when that happens.

Caterpillar just reported earnings for the first quarter of 2012 that featured an increase in profit of 29%. In addition, the company issued a very bullish outlook with Chief Executive Officer Douglas Oberhelman predicting record sales for 2012. As a result, with the stock around $105.50, Caterpillar is close to its 52-week high of $116.46. Year to date, Caterpillar is up 20.69%.

The balance sheet and income statement for Caterpillar are very healthy. On a quarterly basis, both sales growth (34.64%) and earnings-per-share growth (58.30%) are up in healthy double digits. The forward price-to-earnings ratio is just 9.54, while the average price-to-earnings ratio for a stock on the Standard & Poor’s 500 Index is around 15.

Investors buy for the future earnings of a company. Here, Caterpillar is particularly appealing with a price-to-earnings growth ratio of 0.85. According to investing legend Peter Lynch, this is one of the most important financial indicators: a price-to-earnings growth ratio of 1 is adequate, and the lower the more attractive the company.

In addition to a bullish growth future, Caterpillar has a dividend of 1.70% for those investors seeking income too.

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