Top picks 2012: Caterpillar

Caterpillar (CAT) is the world's largest manufacturer of earth-moving equipment. In addition, the company makes diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.

Caterpillar equipment is used in mining, logging and farming, and in the construction, petroleum and transportation industries.
Caterpillar completed the purchase of Bucyrus International in July 2011 for $8.8 billion. Bucyrus makes monstrous trucks, excavators, shovels, drills, and underground mining equipment, which are used in the mining of coal, iron ore, copper and gold.

Sluggish economic growth in the U.S. and overseas is not affecting Caterpilar�s business because many developed countries are catching up on infrastructure construction projects such as roads, highways and bridges, which require new equipment from Caterpillar and other heavy equipment makers.

In addition, the rapid development of infrastructure in emerging countries such as Brazil, China and India provides a bright outlook for Caterpillar for an extended period of time.

Finally, demand for Caterpillar and Bucyrus equipment will strengthen as a result of the need to replace aging construction and mining equipment.

I expect Caterpillar�s sales to increase 13% and earnings to increase 22% in 2012, buoyed by infrastructure spending and the recent purchase of Bucyrus.

The dividend was recently increased for the 18th straight year and now provides a 2.1% yield. At 11.0 times my 2012 earnings per share estimate, Caterpillar is clearly undervalued. CAT is low risk.