CAT - Caterpillar

[bmichaud]

What does the board think about CAT at these levels? The market seems to be pricing in growth that goes straight up from here. Is it too late to get in or will emerging markets carry earnings to record heights as the global economy recovers?

 

[bmichaud]

I take it nobody has an opinion.

 

Not to be a perma bull but I think Prem says it best when he said he gets worried when everyone is absolutely certain that something is going to happen. It is quite difficult to fight the entire market on this one but I believe CAT is a good short at this level. Projected 2011 earnings are around $5 per share which represents an ok normalized level. 20x earnings given their growth level is an ok fair value multiple - perhaps a little aggressive, but gives an intrinsic value of $100. Given that everyone thinks the market is going up, everyone thinks emerging markets will grow in a straight line, and Cramer is touting the stock at this level, I believe it is a good hedge and a decent short in and of itself given my relatively aggressive IV multiple and aggressive normalized earnings level.

[Ross812]

As far as infrastructure is concerned, I like pure plays on repair.  I am a civil engineer and I can tell you all of the Corrugated Metal pipes installed in the 30's 40's and 50's are beyond their design life and deteriorating to the point where collapse is a threat to public safety.  Sliplining is the practice of relining a pipe with either a new structural HDPE pipe or using a non structural fiberglass sock to protect from further corrosion.  I bought Insituform (INSU) in 2009 as a play on this technology.  INSU is now selling at a 20x P/E with a good balance sheet but I would buy more anytime you can get it at a 15x P/E or less (which has happened in the last few months).  You are going to see steady growth in these type of infrastructure repair plays for the next 10-20 years with the outside chance of huge growth when the public jumps on the bandwagon to repair infrastructure.   

[Guest notorious546]

anyone read this book about CAT?

 

http://www.amazon.ca/Caterpillar-Way-Lessons-Leadership-Shareholder/dp/1501211943/ref=sr_1_1?s=books&ie=UTF8&qid=1439336294&sr=1-1

 

has an endorsement from Sam Zell, has me interested...

[berkshire101]

Saw this article recently.

 

Donald Trump Comments May Unearth Caterpillar Activist

 

http://www.bloomberg.com/news/articles/2015-08-11/donald-trump-comments-may-unearth-caterpillar-activist

[Arden]

One thing to note is CAT's huge financial company- with about 30B in loans .

It stands to reason some of these loans have been made to its customers in mining and oil, and some of those are surely having rough times with the crash in commidities.

 

When things get worse, especially in china, this thing could explode. CAT has very fishy accounting- even as metals and iron ore fall by about 50% it has barely any provision for credit losses .I wouldn't be surprised if they tried to play in as if everything is going smoothly until they couldn't anymore.

 

CAT financial reports:

http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000764764&owner=exclude&count=40&hidefilings=0

[Guest Grey512]

One thing to note is CAT's huge financial company- with about 30B in loans .

It stands to reason some of these loans have been made to its customers in mining and oil, and some of those are surely having rough times with the crash in commidities.

 

When things get worse, especially in china, this thing could explode. CAT has very fishy accounting- even as metals and iron ore fall by about 50% it has barely any provision for credit losses .I wouldn't be surprised if they tried to play in as if everything is going smoothly until they couldn't anymore.

 

CAT financial reports:

http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000764764&owner=exclude&count=40&hidefilings=0

 

Normalized return on equity of circa 20%, P/E in the low-to-mid teens, 4% dividend yield. Significant brand power.

 

But on the negative side, you have a 6-7% RoIC, and significant leverage (which is a clue as to how the high RoE is being generated). I.e. potentially a "spread" kind of business.

 

Your point on a potential iceberg danger from the NPL / financial book is somewhat priced in though. There's 7% short interest. 

 

I considered putting this on as a short (purely as a hedge against some long positions) but sucked my thumb, and watched the stock price fall. Bummer. Maybe not too late?

[KCLarkin]

But on the negative side, you have a 6-7% RoIC, and significant leverage

 

I assume this is includes finance business. Have you looked at the ROIC for the core business?

[Guest Grey512]

But on the negative side, you have a 6-7% RoIC, and significant leverage

 

I assume this is includes finance business. Have you looked at the ROIC for the core business?

 

CAT RoiC without Financial Products tends to be 800-900bps higher than the consolidated number.

 

But I guess the interesting questions are: what are you buying when you are buying equity in CAT? What would CAT look like if it suddenly had to stop doing the financing business? What would happen to its competitive position? Is there any way to safely "ignore" the Financial Products business and just pretend that CAT is "overall a high RoiC business"?

I struggle to come up with answers to those questions that are positive for CAT equity.

 

To be frank, maybe it's worth me just putting this one into the "too hard" pile. I think one of the subconscious reasons I ended up not shorting the stock was this plus the fact that Tom Gayner / Markel has owned CAT for a while, and he is not the kind of man whose judgment I want to go against. It's tough one though, because one has to have courage to think for himself. Just a reality of the market.  ;)

[KCLarkin]

CAT RoiC without Financial Products tends to be 800-900bps higher than the consolidated number.

 

But I guess the interesting questions are: what are you buying when you are buying equity in CAT? What would CAT look like if it suddenly had to stop doing the financing business? What would happen to its competitive position? Is there any way to safely "ignore" the Financial Products business and just pretend that CAT is "overall a high RoiC business"?

I struggle to come up with answers to those questions that are positive for CAT equity.

 

To be frank, maybe it's worth me just putting this one into the "too hard" pile. I think one of the subconscious reasons I ended up not shorting the stock was this plus the fact that Tom Gayner / Markel has owned CAT for a while, and he is not the kind of man whose judgment I want to go against. It's tough one though, because one has to have courage to think for himself. Just a reality of the market.  ;)

 

I think you need to evaluate the finance arm and the core business separately, if using ROIC. Wells Fargo gets only 1.4% ROA, so any substantial finance business is going to drag down ROIC.

[Guest Grey512]

CAT RoiC without Financial Products tends to be 800-900bps higher than the consolidated number.

 

But I guess the interesting questions are: what are you buying when you are buying equity in CAT? What would CAT look like if it suddenly had to stop doing the financing business? What would happen to its competitive position? Is there any way to safely "ignore" the Financial Products business and just pretend that CAT is "overall a high RoiC business"?

I struggle to come up with answers to those questions that are positive for CAT equity.

 

To be frank, maybe it's worth me just putting this one into the "too hard" pile. I think one of the subconscious reasons I ended up not shorting the stock was this plus the fact that Tom Gayner / Markel has owned CAT for a while, and he is not the kind of man whose judgment I want to go against. It's tough one though, because one has to have courage to think for himself. Just a reality of the market.  ;)

 

I think you need to evaluate the finance arm and the core business separately, if using ROIC. Wells Fargo gets only 1.4% ROA, so any substantial finance business is going to drag down ROIC.

 

That's a good point and I directionally agree with you that ROIC is not the best measure for this business.

 

In any case - apologies, did not mean to stress that ROIC is the absolute core negative that I see in CAT. I guess my issue is mainly on leverage, which stems from my bias against leverage (probably instilled via experiences of losing money due to leverage). I am even biased against any banks with an Asset/Equity ratio of over 10x, which excludes most non-US banks.

 

I don't think this is a fraudulent company and I do not think it will collapse. In a nutshell, it just looked (i) levered enough, (ii) not enough chance of a large pop in earnings, and (iii) market cap large enough to not be immediately taken over; those were the main reasons I considered shorting some time ago.

[topofeaturellc]

You have to consider leverage on a  deconsolidated basis. Then consider the risks at CAT financial as a stand alone. Historically subs like this that do all secured lending on equipment you can repossess aren't so scary.  Youd expect second tier players to have been more aggressive on vendor finance.

 

Personally I'd wait until you hear the first "losses at Cat Financial are so big they could bankrupt the parent" to get really excited - like Ba and Bcc in 2002.

 

I've done no work on CAT, but historically there finance sub controversy has been a good controversy.

[rb]

The problem repo-in CAT equipment is its transportation which can be extremely expensive. If defaults start to roll in the losses at the finance sub could be quite high.

[topofeaturellc]

High yes, but recoveries are usually OK. Agreed not as good or easy as a plane or car, but fortunately users tend to be clustered.

[Guest Grey512]

You have to consider leverage on a  deconsolidated basis. Then consider the risks at CAT financial as a stand alone. Historically subs like this that do all secured lending on equipment you can repossess aren't so scary.  Youd expect second tier players to have been more aggressive on vendor finance.

 

Personally I'd wait until you hear the first "losses at Cat Financial are so big they could bankrupt the parent" to get really excited - like Ba and Bcc in 2002.

 

I've done no work on CAT, but historically there finance sub controversy has been a good controversy.

 

Thanks, that's useful

[Guest notorious546]

Below I cut out some notes from the company's 2008/2009 annual report. does anyone know where I would be able to find similar data for the company's integrated services businesses segment now? how big has this grown to?

 

- my initial thoughts are that this would have continued to grow at a moderate pace given the user base for CAT equipment is now larger than 5 years ago, increasing maintenance, repair and overhaul revenues/sales. the quality of cash flow is much higher given larger installed user base.

 

2008 AR

- The ongoing growth of our integrated services businesses, which represent 34 percent of the company’s total sales and revenues, helps provide earnings stability

 

2009 AR

- First we have a solid business, model. Our global footprint, diverse line of products and services and comprehensive and well-understood strategy all contributed to our admirable performance. Notably, our integrated services businesses helped buffer the impact of the recession and climbed to 46 percent of the company’s 2009 sales and revenues.

 

[Guest Grey512]

Chanos short Caterpillar

 

http://www.marketfolly.com/2015/08/jim-chanos-says-china-worse-than-you.html

 

 

[fareastwarriors]

The Whistleblower Behind Caterpillar’s Massive Tax Headache Could Make $600 Million

 

 

The construction giant faces a $2 billion IRS bill and possible criminal charges, while the accountant who tipped off the feds stands to make a windfall.

 

 

https://www.bloomberg.com/news/features/2017-06-01/the-whistleblower-behind-caterpillar-s-massive-tax-headache-could-make-600-million