Buy CAT – But Not Yet

If Johnson & Johnsonis the stock to own should Barack Obama bungle our much-needed stimulus plan, then Caterpillar is what you buy if he gets it right, Cramer said Thursday.

Caterpillar’s enjoyed a big run since Obama first announced his infrastructure-friendly plan a few weeks ago, but Cramer thinks the focus seems to have shifted to extending unemployment benefits and state handouts. If the president-elect does come through, though, CAT could finish the year at $55 a share, $11 higher than where the stock is now.

But don’t buy the stock just yet. As we said, Caterpillar has already had a sizable move, and Cramer said the estimates are still too high. With the decline in global demand for CAT equipment still a concern, meaning a bad first quarter is likely, those estimates would have to drop about 20% before the stock could move. So Cramer recommended waiting until the share price falls below $40 before building a position. This is more a play on the second half of 2009, when housing bottoms and worldwide stimulus orders should kick in.

What you really own CAT for right now is the dividend, which is at 4.3%. The yield has reached 4% only three times in the past 20 years before this most recent meltdown, and buyers at those levels made big money: Once in October 1990, and then CAT surged 44% in just five months. In October 2000, then CAT soared 62% in six months. And in October 2002, when the stock soared 135% over the following two years. Cramer thinks this is a similar opportunity.

And that dividend looks safe. Caterpillar is expecting a 2009 cash flow of $7.63, which is plenty to cover the $1.72 payout. The company even froze wages and laid off workers, a sign, Cramer said, that CAT’s committed to maintaining that dividend.

Expect this stock to take a hit after Friday’s unemployment number is released. But CAT is a cyclical stock. It needs a strong economy to perform well. So just look at any decline as the catalyst needed to reach Cramer’s target price of below $40.

Jim's charitable trust owns Johnson & Johnson.

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