Zacks Industry Rank Analysis Highlights: Caterpillar and Deere

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May 05, 2011, 09:30 ET

CHICAGO, May 5, 2011 /PRNewswire/ -- Stocks featured in this week's Zacks Industry Rank analysis include Caterpillar (NYSE: CAT) and Deere (NYSE: DE)

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Zacks Industry Rank Analysis is written by Dirk Van Dijk, CFA, Chief Equity Strategist, Zacks.com.

Machines Still Working

Seven separate "Machinery Industries" are in the top 36 based on average Zacks Rank, and six are in the top 25. Three of the "industries" are about average in size for a Zacks Industry, with between six and eight firms. Three others are small, with five or fewer firms in them. One, General Industrial Machinery, is a very large industry with 41 firms in it.

Farm Machinery Tops List

The strongest is Farm Machinery, which is in an overall tie for first place in the Zacks Industry Rank Iist, a position it held last week as well. The average rank for the six firms in the group is 1.83, unchanged from last week.

The Farm Machinery firms are also benefited from extremely strong farm income due to high commodity prices. Farm proprietors incomes have increased by 27.4% over the last seven months, and it was not like they were doing all that bad seven months ago. Farmers are going to use some of that higher income to buy new Tractors, Combines and Irrigation equipment.

Close on its heels is the Machine Tool group, in third place (remember there was a tie for first) with an average score of 1.86, down from 2.14 last week and an improvement of six spots. The Machine Tool group has seven members. The tiny Engines group (2 firms) is in fourth place with an average score of 2.00, unchanged from last week, but down one spot in the rankings.

The General Industrial Machinery Group is in 16th place with an average score of 2.37. Its place in the ranking table was unchanged from last week, while the average rank dropped slightly from 2.39. Given the law of large numbers, it is rare to see a group this large go this close to either the top of the bottom of the list.

Filling our the list are the Construction Machinery group, in 17th place with an average score of 2.38, an improvement from 2.50 last week pushing it up five spots in the rankings. The Material Handling group had the biggest improvement, moving up 34 spots to 23rd place as its average rank fell to 2.50 from 2.75.

The Industrial Automation/Robotics group is moving the other direction, falling 19 spots to 36th place as its average score rose to 2.60 from 2.40. Still, 36th out of 256 is not exactly awful.

The first table shows the Machinery and Related stocks that hold the enviable Zacks #1 Rank (Strong Buy). The second table shows the Zacks #2 Ranked (Buy) firms. Note that there are almost as many on the #1 list (18) as on the #2 list (22). That is unusual in that there are three times as many "#2's" as "#1's" in the Zacks Universe as a whole.

Only the best 5% earn the Zack #1 Rank, and the next 15% earn a Zacks #2 Rank. In these seven industries, 24.7% have Zacks #1 Ranks and 30.1% have Zacks #2 Ranks. There is a wide range of market capitalizations to chose from on the list, ranging from icons like Caterpillar (NYSE: CAT) and Deere (NYSE: DE) to sub-$100 million microcaps.

Valuations are for the most part a bit on the steep side looking at 2011 earnings, but rapid earnings growth means that they are much more reasonable if you are willing to look out to the 2012 expected earnings. Also, the estimates on these firms are rising, and an estimate in motion tends to stay in motion, so the true P/E on these firms might be lower than it looks based on current estimates.

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Contact: Dirk Van Dijk, CFA
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