When China announced a plan this month to spend $157 billion on infrastructure, Richard Lavin, who oversees Caterpillar's (NYSE:CAT) China operation, told a Reuters reporter at a conference in Russia that his team expects the stimulus to have "a fairly broad and significant impact" across the equipment maker's business. After the news, investors bought the stock and exposed themselves to higher accounting and governance risk than they would have taken in 96% of comparable companies. Caterpillar's financial data gives it an AGR score of 4.
It remains an open question to what extent this uncertainty affects the stock price. As the Chinese and European economies have struggled, Caterpillar shares have fallen by 2.1% in the year to date to trade at around $88.61 per share intra-day on September 13, in contrast with the Dow Jones Industrial Average's 9.2% gain during the same time period. During the past five days, however, Caterpillar stock gained nearly 4.6% versus the benchmark index's 0.3% rise.
Caterpillar's chairman and CEO Doug Oberhelman said July 25 that his company, which has grown its earnings per share for every quarter but one since March 2010, profited 67% more during the three months ended June 30 compared to the same period of last year. "Our global footprint, the breadth of industries we serve and our extensive line of products and services have helped us achieve these record-breaking results during this time of heightened economic uncertainty," Oberhelman said. But he also narrowed his outlook range for 2012 sales to between $68 billion and $70 billion from the previous $72 billion.
These days, much of Caterpillar's revenue has yet to be collected. The amount that customers owe the company within a year has risen from an average $14.1 billion as of June 30, 2010 to an average $17.9 billion as of June 30 this year, or 27% of sales versus the industry median of nearly 16%. CEO Oberhelman said on a conference call July 25 that his team is "working with dealers to actually sell more products," and also put new programs in place over the past couple months that will start to yield results in the third quarter.
The company has been in transition. In an effort to broaden its line of products, Caterpillar spent around $8.8 billion to buy the Wisconsin-based mining machinery maker Bucyrus International, Inc. in July 2011 -- Caterpillar's biggest such deal since at least 1980, according to data compiled by Bloomberg. Bucyrus had sold directly to its customers, unlike Caterpillar, which worked through dealers. Caterpillar has sold pieces of Bucyrus's equipment distribution and support business to its dealers in recent months, and as of July this year, continued to hold discussions with other dealers that will operate the former business until the transitions have occurred.
The company also decided to use the Caterpillar brand for Bucyrus's mining products. "The decision was endorsed by the Bucyrus board of directors, and we will begin to transition Bucyrus products to the Caterpillar brand in a quick and orderly fashion," Caterpillar Group President Steve Wunning said in a statement July 8, 2011. Caterpillar said its intangible assets, which include brands, amounted to more than $4.5 billion as of September 30, 2011, up astoundingly from $775 million in the previous quarter.
While these red flags linger in addition to others, it remains anyone's guess what happens next to Caterpillar's business in China - stimulus or no stimulus. "I'm very reluctant to take too bold of a move on inventory in China, because we have seen this China show before many times in the last 25 years," CEO Oberhelman said on his July 25 conference call before news of the stimulus. He said he's seen an absolute stop in demand for excavators and wheel loaders, and then within a year a recovery takes place nonetheless - sometimes a "booming" one and sometimes "just a nice one." If Caterpillar misses such a recovery and has insufficient inventory, it will be out of that game, he said.
In the meantime, investors can keep scrutinizing Caterpillar's financial performance numbers.
Region: North America
Country: United States
Industry: Construction / Agricultural Machinery
Market Cap: $ 55,677.8 mm (Large Cap)
ESG Rating: D
AGR Rating: Very Aggressive (4)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a financial reporter at GMI. The reporter has no business relationship with any company whose stock is mentioned in this article. Nobody paid GMI to write this article on his or her behalf.