Zacks Analyst Interview Highlights: Caterpillar, Dover Corp. and Terex.

CHICAGO -- Zacks.com releases the latest Analyst Interview. Today's interview is with senior analyst Mario Ricchio, who discusses Caterpillar (NYSE:CAT), Dover Corp. (NYSE:DOV) and Terex (NYSE:TEX).

A synopsis of today's Analyst Interview is presented below. The full article can be read at http://at.zacks.com/?id=2678.

Ahead of Q3 earnings, are you recommending investors overweight, underweight or market-weight the machinery industry?

For the next six to twelve months, we would market-weight the machinery industry. The fundamentals remain solid. Within our coverage universe, we expect the average machinery stock to grow EPS at least 20% in the third quarter. Unfortunately, share prices have factored in future earnings growth. We expect the upside potential in machinery stocks to be in-line with the market over the next 3-6 months.

While some of the high-fliers like Caterpillar (NYSE:CAT) and Dover Corp. (NYSE:DOV) experienced a share-price pullback recently, we would refrain from buying either stock for a couple of reasons. First, the odds of an economic recession increase daily, based on the amount of prior monetary tightening applied from central banks in Japan, Europe and the U.S., as well as the recent interest rate hikes in China. Machinery order growth tends to decelerate sharply in periods of economic weakness. In our view, the risk of an economic slowdown has not been fully contemplated by investors. Historically, the best time to buy cyclical stocks is at the trough of the economic cycle.

Second, valuations look cheap only on the surface. At the peak of earnings growth, P/E multiples are always low. This is the current reality faced by shareholders of CAT and DOV, whose shares trade at peak FY07 EPS multiples of 10.4X and 13.5x, respectively. As forward earnings decelerate or even decline, the valuation multiple can expand quite sharply, making the stocks less attractive if your looking at just the P/E.

Are there any good growth stories investors should be made aware of?

Terex (NYSE:TEX) is a good growth story. The company remains exposed to certain markets - mining-machinery and road-building - that are expected to outperform the commercial and residential construction segment in a housing-led slowdown. Even if the U.S. economy decelerates, the U.S. badly needs to rehabilitate its infrastructure, starting with our roads and highways. The six-year, $286 billion highway bill passed in response to these needs will, we believe, be a demand catalyst for Terex road-building equipment.

In the mining-equipment segment, Terex reported a 27% increase in second quarter backlog. Double-digit EPS and sales growth is expected for the rest of this year and next. Despite all these positives, we do worry that slower global growth could negatively impact the commodity price outlook in late 2007, leading producers to cut back on equipment purchases starting in FY08.

Read the full interview at http://at.zacks.com/?id=2647.

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