Opinions
John Zechner
Caterpillar
CAT-N
PAST TOP PICK
Nov 06, 2017
Stock price when the opinion was issued
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CAT is $165B market cap, 17X earnings, 1.62% yield, 6.96% five year dividend growth, down 4% YTD, debt/cash flow about 3X, forward growth about 10%. DE is $135B, 25X earnings, 1.30% yield, 14.68% dividend growth, 5X debt/cash flow, forward growth 15%. We would consider both HOLDS today. While good companies, they will be vulnerable in a global economic decline, as both have been in prior cycles. Automation/AI will help margins, but this will take some time to show up in the numbers. Mining expansions (CAT) and weak spending (DE) will likely mean less-than-robust growth and/or weak sentiment for a period of time.
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Rough go recently. About 50% of production is domestic to the US. 35% of its business is recurring service revenue, encouraging. Questions around international business. If recession and tariffs are permanent, expect trouble.
If those clouds dissipate, this could be a good entry point. US administration has changed, but infrastructure renewal needs remain strong. What you could do is buy this, but barbell it with more defensive areas such as telcos, utilities, consumer staples.
(A Top Pick Nov 16/16. Down 52%.) *Short* At the time, this was trading at over 30 times earnings, with basically 3 years of down earnings. It was trading at a ridiculously high multiple. They missed on the past 5 quarters, and the stock had run up on the idea that Donald Trump was going to build the wall using thousands of Caterpillar tractors. He underestimated the global recovery, which helped sales. On top of that, they operationally improved their margins to such a degree that earnings recovery has grown through the estimates in the last three quarters. Has shorted again recently because, although a good story, it is trading at 25X what he thinks will be their peak earnings.