Hayden Cole
Long/short equity, deep value, special situations

Continued Operating Weakness, Macro Risks, And Premium Valuation Make Caterpillar A Sell

Caterpillar (NYSE:CAT) shares have had a stellar 6 months, rallying almost 30% in that time in anticipation of an improving construction market in the US and stabilization in other key markets after a difficult year in 2013.

However, based on a number of factors I believe CAT shares are substantially overvalued at the current price; I estimate fair value, even with optimistic assumptions, is closer $70.

After adjusting for inventory impacts and non-recurring items, Q1 was weak

At face value, CAT Q1 results seemed encouraging. CAT reported flat revenue and EPS of $1.61 and $1.44 before/after restructuring costs, versus $1.31 in the year-ago quarter.

Almost half the EPS improvement of nearly 10% was attributable to the lower share

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