Doug Oberhelman has been CEO of Caterpillar (NYSE:CAT) since July 2010. I believe that if you can judge the ability of CEOs more accurately and early in their respective careers, you might be able to gain an edge on the market. Currently I'm intrigued by the possibilities of alpha derived of CEO analysis. Inspired by an excellent chapter in The Manual of Ideas, called Jockey Stocks: Making Money alongside Great Mangers, I set up a spreadsheet to base CEO performance analysis on. In this article I'll share my research on current Caterpillar CEO Doug Oberhelman with you:
|Caterpillar||return on capital||return on equity||book value (per share)||margin profile||asset turnover||capital expenditure trends|
|2010 July 1-December 31||4,44||27,6||16,94||9,3||0,69||-2586|
Having only four years of data to work with has both an up- and downside. Reliability suffers from the small sample size but the upside is that excellent CEOs with only a few years on the job might not be recognized as such.
Immediately the excellent RoE that Caterpillar achieved over the past few years jumps out. Margins jumped for a few years but are back at square one. The capital expenditure trend is upward and when coupled with decent RoC, that's great for shareholders.
To get a better perspective on the numbers let's compare Doug Oberhelman's performance to that achieved by Tetsuji Ohashi and Kunio Noji at Komatsu (OTCPK:KMTUY) over the same period. Normally I prefer to compare a CEO to another CEO who held the top spot over the entirety of that period. In this case I'll compare Caterpillar to Komatsu because the firms are prime rivals.
|Komatsu||return on capital||return on equity||book value (per share)||margin profile||asset turnover||capital expenditure trends|
|2010 July 1-December 31||10,12||17,15||11,47||12,1||0,9||-100820|
Although Komatsu managed quite satisfactory RoC the firm is lagging its U.S rival in RoE. Development of book value is also lagging vs. its main rival. I examined if excessive leverage is the cause of the disparity between the company's performance.
When we compare the firms on financial leverage it becomes clear that this may be a source of Caterpillar's outperformance. However it is also up to the CEO to determine the perfect amount of leverage. Oberhelman worked to decrease the leverage of the firm. Early 2011 leverage stopped declining as quickly and it is only being decreased gradually now. Judging by RoE's that Oberhelman managed to attain he did a better job. However investors should be aware there is a difference in leverage between the two firms.
Furthermore operating margins the company's achieved are quite similar and so is asset turnover. The Komatsu team did ramp up capital spending a lot harder and if they can sustain current RoC that is a strong improvement. Overall, it appears Oberhelman has been the better choice from a shareholder's perspective.
Oberhelman vs Previous Management
In addition to comparing Caterpillar and Komatsu, I also want to see what changes Oberhelman made to the Caterpillar organization. The big flaw of this type of comparison is that we are measuring performance over time periods that were quite different. That being said, let's get into it:
If we look back over the past ten years, it becomes clear management team's at Caterpillar did an excellent job or enjoyed great tail winds or both. RoE has been remarkably strong and Oberhelman's tenure is certainly no disappointment on that front.
Oberhelman and his team also did a great job managing margins. They set a record over the past ten years and showed overall above average performance. How margins are managed can definitely be telling and in perspective of the company's performance it adds to my confidence management is performing well.
The final metric I want to review is cash flow to CAPEX. Both a low CF to CAPEX and a high one can be a sign of great management. When a management team is able to achieve high RoE I love to see low CF to CAPEX. If management is able to allocate capital efficiently and at high returns that is something I prefer to having it returned to shareholders, which is the second best use of capital. Oberhelman does not appear to take a dramatically different approach to capital allocation. The graph doesn't show a marked shift from the strategy of his predecessor.
I started this performance review with no expectations and I am pleasantly surprised by the results. Although market circumstances or other factors outside of his control may have been favorable, Oberhelman attained solid numbers so far. After my examination I rate Oberhelman as an above average CEO and will definitely include this as a positive factor into my valuation of the company.
Strangely enough, the market does not agree (or hates the company for other reasons) as the company did beat its Japanese rival over Oberhelman's tenure, but is seriously lagging the S&P 500.