Why You Should Ignore the ‘News’ on Caterpillar (CAT)
The negative news flow of the past few days has been awful for Caterpillar – factories are closing, sales are down. Time to sell right? Surely the stock price will be pummeled? Wrong on both counts. In this article I’ve provided the simple bull case for Caterpillar and it boils down to one thing – expectations.
Caterpillar just announced that its global sales of machinery by its dealers fell -12% over the last (source: WSJ ) three months and this is a bullish announcement. It means that the anticipated reduction in sales are at the higher end of expectations.
At the other end of the spectrum, John Deere just reported earnings that were well received by Wall Street. For comparitive purposes, I’ve included a bunch of tables contrasting some of the growth/earnings metrics for Catepillar and John Deere. It looks rather dismal for Caterpillar. Indeed the numbers are dismal, but CAT is one of those situations where you have dig a bit into the numbers to get to the truth and you have to measure bad news against expectations – do this and you will realize that things are not as bad as they seem, and indeed might get even better for the company going forward.
|Stock||PE||Price/Sales||Div Yield (Trailing Annual)||Volatility|
Some things to be aware of with regard to CAT:
- It gets on 3% of its sales revenue from China. So, don’t worry about China too much.
- The company has been firing people (13,000 over the past year) and closing plants – most recently, a small factory in Virginia that specialized in coal haulers. Note that a drop in demand for coal haulers shouldn’t surprise anyone at a time when coal use in general is declining in favor of natural gas.
- The company has made a lot of acquisitions associated with mining (ERA Mining, Bucyrus) and this has coincided with a sharp drop in demand globally for mining equipment. Unfortunately for CAT, deals like this take years to digest fully. (Source: Reuters)
Looking at the quarter on quarter growth for the company, it looks ugly, but you have to recognize that Caterpillar is in a consolidation and cost cutting phase, and most importantly, that none of this is ‘news’. It is already baked into the price. This is also why the rather ugly announcement yesterday about dropping sales only caused a 1% drop in the stock price.
|Stock||EPS Qtr. On Qtr. Growth||Rev Qtr. On Qtr. Growth|
|DE||18.1% ( High )
8.3% ( Ave. )
0.3% ( Low )
|-9.1% ( High )
-15.2% ( Ave. )
-21.8% ( Low )
|-4% ( High )
-11.4% ( Ave. )
-13.3% ( Low )
|-3% ( High )
-9.6% ( Ave. )
-14.8% ( Low )
|CAT||33.5% ( High )
23.9% ( Ave. )
18.2% ( Low )
|12.2% ( High )
-4.6% ( Ave. )
-14.5% ( Low )
|-12.3% ( High )
-15.4% ( Ave. )
-20.8% ( Low )
|3.7% ( High )
-1% ( Ave. )
-6.4% ( Low )
CAT has been in a trading channel and the recent negative sales announcement did not change that, merely driving it down a bit toward the bottom of its range. Note that CAT was trading as high as $99 over the past year, so it has already been hit. The stability of this chart in the face of plant closings and a negative earnings report tells me that CAT is done going down.
In the spirit of full disclosure, I am currently long Caterpillar.