As Caterpillar states on its website, the company is "the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company also is a leading services provider through Caterpillar Financial Services, Caterpillar Remanufacturing Services, Caterpillar Logistics Services and Progress Rail Services." If you are in or around infrastructure industries, no doubt you have run into its products -- Caterpillar is active in 180 countries, with over 300 different products provided in more than 500 different locations. Over 50% of its revenue is achieved outside of the U.S.
This is a company with good history of quality and diversification -- both product-wise and geographically. In a recent presentation, management provided investors with its updated -- though not complete -- forecast until 2015:
- 2012 sales are expected to be cut by about $2 billion due to a somewhat sluggish global economy.
- 2013 expected to resemble 2012, with better growth expected in 2014 and 2015.
- While management expects moderate growth as its base scenario, it seems to have prepared for worse scenarios of moderate recession and full-scale recession.
- 2015 EPS is expected to be in the range of $12-$18 instead of $15-$20, which was the previous target (current EPS almost $10).
Since the presentation on Sept. 24 the market punished the stock, sending it almost 13% lower and 29% beneath its 52-week high. Unlike Mr. Market's commentary, I think most points made during the presentation (read the transcript here) were actually quite encouraging.
In attempt to arrive prepared at a downturn, management will focus on several issues, with a healthy balance sheet being a priority:
- Debt will be decreased.
- Capex will be decreased after the company has performed several acquisitions and does not expect any new ones in the near future.
- Expenses will be cut and closely monitored. Synergy on new brands purchased are expected to create huge savings.
- The after-market will be developed to strengthen brands, with several new factories built for spare parts.
- Product quality will continue to be excellent, assisting product sales growth and markets penetration.
A healthy cash flow is a priority, and management is committed to the dividend's safety. More intensive penetration to several developing markets, especially the Chinese one, is planned. While growth in China and Brazil has slowed down recently, management expects a turnaround to happen along the way until 2015.
Additionally, the company expects the populations of undeveloped countries desire to live like in the developed countries to be a material tailwind. Management sees the U.S. housing market and infrastructure turning around soon, providing even more tailwinds for the company. It believes (based on private discussions) that the fiscal cliff problem will be solved after the U.S. elections. Also, European leaders are expected to do the minimum they are required to for growth to begin.
Taking all that into account, assuming recession hits, management has prepared the company for two major scenarios:
- A mild recession leading to 15% reduction in revenue, expected to lead to EPS of $6.
- A more severe global recession in which EPS of $3.50 is expected.
The most encouraging point of all is that management believes in and is internally setting a goal based on a different scenario than these two. It sees a base scenario of moderate growth until 2015, and claims that pleasant surprises (even if only in some of the areas discussed, globally or locally) can put the company back on track to the previous 2015 target of $15-$20 EPS.
The table below contains some figures about Caterpillar and its competitors:
|Caterpillar (CAT)||Deere & Company (DE)||Cummins (CMI)||Terex (TEX)||OshKosh (OSK)||Manitowoc (MTW)||Joy Global (JOY)|
|Market Cap ($ millions)||54,000||31,800||16,500||2,470||2,740||1,760||5,930|
|Cash Flow From Operations (Trailing 12 months, $ millions))||5,723||556||1,726||256||183||80||398|
|Adjusted Price (*) / Operating Cash Flow||9.40||54.06||6.96||9.25||15.70||42.43||14.13|
|Dividend Yield (%)||2.51%||2.27%||2.29%||N/A||N/A||0.60%||1.25%|
|Dividend Payout Ratio||21%||23%||16%||N/A||N/A||13%||10%|
|Total Debt / EBITDA||3.44||5.60||0.32||4.58||1.97||5.47||1.26|
|Adjusted Price (*) - Calculated as Market cap + current assets + LT investments + fixed assets - total liabilities|
Checking Caterpillar's numbers vs. the competition, several important facts arise. Caterpillar had, by far, the highest cash flows from operations. As capex is expected to decrease, most of the cash flows are expected to assist as described above. Since the current high capex level is to expected to remain, I used operating cash flows instead of free cash flows.
Price to operating cash flow and PEG is at the lower end in the group, indicating Caterpillar may be relatively cheap.Total debt to EBITDA could be lower -- this is one of management's goals (to both decrease debt and increase EBITDA). The dividend yield is the highest in the group. But even though the payout ratio is reasonable and management is committed to keep paying, keep in mind it raised dividends consecutively during the last 19 years.
While the CEO's presentation is a convincing one, and while I do like the numbers in the table above as well as Caterpillar's market position and management's proven abilities, I do tend to be bearish on global recovery for various reasons (as expressed here). I think trying to evaluate what 2015 EPS will be is a tough, or even impossible, task given the extent of global uncertainties. But at least it draws a target to aim at, whether things get better or worse. It is comforting to know that Caterpillar has competent management that has shown it knows how to prepare, and how to get past global recessions and come out of them much stronger.
Had we been in a "normal" market, Caterpillar's current price of just below $83 per share would have been considered cheap for the long term. I also think the market has somewhat misinterpreted the CEO's comments during the presentation. Keep in mind that, after all, the current average one-year analyst target for Caterpillar is $103.45
However, since I expect more declines in close future on (mainly) weak macroeconomic outlooks and market volatility, I think the stock will get more unjustified punishment from Mr. Market. Therefore, I'd wait some more and try to be a buyer at $70-$75 per share.