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  • Why Deere & Company Should Interest Long-Term Investors [View article]
    I wrote something on SA in response to an article titled “This Company Makes Caterpillar Look Expensive,” published July 11, that addresses the question of why Caterpillar (CAT – 101.94) usually sells at a higher P/E multiple than Deere (DE – 85.37). It seems to fit here, so I’ll paste it in.

    Before that, however, I’d point out that Caterpillar’s machines are NOT utilized primarily for mining. In the most recent quarter, mining (Cat’s Resource Industries segment), was only 16% of Cat’s sales. That was down from the 2012 full-year peak of 33% of sales. In the most recent quarter, of Cat’s total sales, Construction Industries was 38%, Energy & Transportation (engines, turbines, and locomotives) was 36%, Other was 4%, and Financial Products was 6%. So you see, any further weakness in mining would have a relatively small impact on Cat’s sales.

    At the full-year 2012 peak of Cat’s sales and earnings, of total sales, Resource Industries (mining) was 33%, Construction Industries was 30%, Energy & Transportation was 32%, and Financial Products was 5%.

    The following is what I wrote on July 11 in response to the article: “This Company [Deere] Makes Caterpillar Look Expensive.”

    “There are reasons Caterpillar’s (CAT – 109.96) shares have almost always been more expensive than Deere's (DE – 88.53), at least for the 40 years I've been following both companies closely.

    As JackBolly said above, Cat and Deere are very different companies. You [the author of the article] described Cat in your article, but did not describe Deere. Those who write about investments like to lump Cat and Deere together, but there is no justification for doing so. The chief thing the two companies have in common is that they both make machines that are powered by engines, steered by drivers, and that move about on rubber tires or tracks - mobile equipment, that is.

    The bulk of Deere's sales and earnings come from farm equipment. Cat does not make or sell farm equipment.

    A small part of Deere's sales and earnings come from construction and forestry equipment, but that business is almost entirely small and medium-sized equipment and sold almost entirely in North America (a tiny bit goes to Latin America). Deere is NOT in the large construction equipment, mining equipment, diesel engine, gas turbine, or locomotive businesses, whereas the bulk of Cat's sales and earnings come from those businesses.

    Cat's sales and earnings are driven primarily by global economic growth rates, and historically, because Cat is: (1) continually broadening its product line and (2) gaining market share, Cat's growth has been several multiples of global economic growth rates, albeit cyclical, not straight up.

    Deere's sales and earnings are driven primarily by the level of global grain prices, which, in turn, depends on the weather, not on global economic growth rates. That makes trends in Deere's sales and earnings more difficult to predict and therefore more uncertain than Cat's, which uncertainty contributes to Deere’s lower P/E multiple and valuation.

    The primary driver of Deere's sales and earnings has been global grain consumption. Historically, grain consumption has grown at GDP rates or less. In recent years, the growth rate of grain consumption has increased, as it has benefitted from a shift to meat vs. rice and vegetable consumption in developing regions, particularly Asia. Meat requires more grain per unit of foodstuff than other foods, because animals consume a lot of grain.

    Deere has also been helped by a shift to larger machines in developing countries, which mix shift favors the more sophisticated machines Deere provides. Historically, though, most sizable countries, including China, Russia, India, and Brazil, among others, have local farm equipment makers who make machines that are perfectly adequate for local needs and less expensive than Deere’s. As a result, in developing regions, Deere faces more competition than does Cat.

    Both companies are exceptionally well managed, with long-established Lean manufacturing practices that have resulted in continuous improvement in the efficiencies of their factories, offices, and capital consumption during the past three decades. There are no significant differences between them in the management arena.

    A final note: Caterpillar’s 178 global dealers are Cat’s most powerful competitive strength, something that by the nature of its business, Deere can’t match. Many Cat dealers are huge companies in themselves, with an aggregate net worth at the end of 2013 of $21.8 billion, or an average net worth of $122 million per dealer. Cat’s business, in which users of Cat’s equipment are often far from any population centers or even towns, lends itself to being serviced by large, well-financed dealers.

    The large dealer approach that works with construction and mining equipment does not work well with farm equipment, as Cat discovered when it tried to expand into farm equipment with a unique, internally developed rubber-tracked farm tractor called the Challenger, which Cat introduced in 1987. That business was never larger than about $500 million a year, and Cat sold it to AGCO (AGCO – 53.52) in 2002.

    One problem Cat had in farm equipment: except for giant corporate farms, most farmers prefer dealers who are relatively small and local, not half a state away and where the small and medium-sized independent farmer feels he’ll get the attention he needs.

    For example, if a combine breaks down during harvest, every minute the machine is down, the farmer is losing money. The farmer wants to know his dealer and the repair parts he needs are 10 minutes away, not 100 miles away, so he can get his machine repaired and running again in half an hour, not half a day.

    That means farm equipment companies are unable to develop networks of huge, powerful, well-financed dealers who can simply dominate the business. By nature, farm equipment distribution is more local and more competitive than construction or mining equipment distribution.

    Moreover, in its construction and forestry equipment business, the fact that Deere does not make either large construction machines or any mining equipment, means Deere’s line of small and medium-sized equipment lends itself to a network of small, local dealers instead of the large, dominant dealers in Cat’s business.

    Finally, Cat’s dealer network is the largest, most powerful, most dominant dealer network in the world, in any product line. A Cat franchise is a very valuable asset - owning a Cat dealership is a license to coin money. For that reason, Cat can exercise relatively tight control of its independent dealers, most of whom would not want to lose that franchise.

    BTW, the debt/equity ratios in your report are misleading. Would you buy a cyclical capital goods company with a debt-to-equity ratio of 187% or 341%, as you have shown for Cat and Deere, respectively? Of course not!

    Both companies own finance subsidiaries. You need to exclude the finance companies’ debt when you calculate the debt/equity ratios of the operating companies, otherwise the numbers are meaningless. For example, if we exclude Cat’s finance company debt, which debt is secured by the Cat equipment and other assets owned by Cat’s dealers and customers that Cat Financial has financed, Cat’s debt/equity ratio on 3/31/14 would be 43%, not the 187% you’ve shown (I don’t have Deere’s numbers handy).
    Jul 11 05:18 PM”
    Aug 8 10:19 AM | 4 Likes Like |Link to Comment
  • Caterpillar - Investors Ignore Low Quality And Financially Engineered Earnings [View article]
    Don: Well put. And RIGHT!
    Jul 25 07:01 PM | Likes Like |Link to Comment
  • Caterpillar - Investors Ignore Low Quality And Financially Engineered Earnings [View article]
    Nino91007: For some of the reasons many mutual funds and other professional investors own and like Caterpillar (CAT - 104.99), click on the word "Comments" under my user name above for my past comments on Cat. Don't be misled by the shorts on this thread. They will be wrong, at least until this global economic cycle peaks, which is several years away.

    Cat is by far the dominant company in the global construction and mining equipment business, a business that does not peak until the global economic cycle peaks. Again, that economic peak is several years away, and when we reach that peak, the demand for Cat’s equipment and Cat’s sales, earnings, and stock price will be a lot higher than today.

    During the 41 years I’ve followed Cat closely, I’ve studied Cat’s cycles and history back to 1945. In 1945, just after World War II, Cat made only 3 kinds of machines – crawler tractors (bulldozers), motor graders, and scrapers, and for those 3 product categories, Cat offered a total of nine models – not nine models for each category, but nine models in total (check Cat’s 1945 annual report).

    Since then, for the past 69 years, it’s been nothing but solid, above-average growth for Cat – expanding its product line and taking market share from competitors in nearly every new product category it entered (two major exceptions, which product lines Cat exited some time ago, were on-highway truck engines, which proved to be a low-margin commodity-like business in which Cat’s competitive strengths did not give Cat a sufficient advantage, and farm equipment, in which Cat’s network of a relatively few large dealers proved to be a competitive disadvantage instead of an advantage).

    Cat is now by far the dominant company in the global construction and mining equipment business, with a virtually unassailable competitive position and customer franchise and the strongest dealer network in any product line in any business. Cat is exceptionally well managed (not perfectly managed, it does make mistakes), with one of the most advanced Lean Six Sigma management and manufacturing continuous improvement programs one can find. Cat’s strong balance sheet and cash flow is financing a program of healthy dividend increases and share repurchases that has returned many billions of dollars to its shareholders in recent years.

    Since World War II, Cat’s stock has tracked its trailing 12-month (NYSE:TTM) EPS fairly closely, with its peak stock price coming almost always in the quarter or 6-month period when its TTM EPS peaks. That peak is several years away, which, together with the other factors I’ve mentioned, is the chief reason professional investors own a lot of Cat.
    Jul 25 03:15 PM | 3 Likes Like |Link to Comment
  • Evaluating Caterpillar's Dividend Growth Potential [View article]
    Hayden: It will be interesting to compare Cat's results in China with Komatsu's results, when Cat reports on July 24th.

    In the meantime, again, you insist on looking backwards when you should be looking ahead. The market has already discounted 2Q results and is reacting partly to the prospect that mining equipment sales will see bottom in 2014, as Komatsu has forecast in the Bloomberg story you linked to in your 10:02 pm comment on July 11. Thanks for the reference.
    Jul 13 08:14 PM | Likes Like |Link to Comment
  • This Company Makes Caterpillar Look Expensive [View article]
    There are reasons Caterpillar’s (CAT – 109.96) shares have almost always been more expensive than Deere's (DE – 88.53), at least for the 40 years I've been following both companies closely.

    As JackBolly said above, Cat and Deere are very different companies. You described Cat in your article, but did not describe Deere. Those who write about investments like to lump Cat and Deere together, but there is no justification for doing so. The chief thing the two companies have in common is that they both make machines that are powered by engines, steered by drivers, and that move about on rubber tires or tracks - mobile equipment, that is.

    The bulk of Deere's sales and earnings come from farm equipment. Cat does not make or sell farm equipment.

    A small part of Deere's sales and earnings come from construction and forestry equipment, but that business is almost entirely small and medium-sized equipment and sold almost entirely in North America (a tiny bit goes to Latin America). Deere is NOT in the large construction equipment, mining equipment, diesel engine, gas turbine, or locomotive businesses, whereas the bulk of Cat's sales and earnings come from those businesses.

    Cat's sales and earnings are driven primarily by global economic growth rates, and historically, because Cat is: (1) continually broadening its product line and (2) gaining market share, Cat's growth has been several multiples of global economic growth rates, albeit cyclical, not straight up.

    Deere's sales and earnings are driven primarily by the level of global grain prices, which, in turn, depends on the weather, not on global economic growth rates. That makes trends in Deere's sales and earnings more difficult to predict and therefore more uncertain than Cat's, which uncertainty contributes to Deere’s lower P/E multiple and valuation.

    The primary driver of Deere's sales and earnings has been global grain consumption. Historically, grain consumption has grown at GDP rates or less. In recent years, the growth rate of grain consumption has increased, as it has benefitted from a shift to meat vs. rice and vegetable consumption in developing regions, particularly Asia. Meat requires more grain per unit of foodstuff than other foods, because animals consume a lot of grain.

    Deere has also been helped by a shift to larger machines in developing countries, which mix shift favors the more sophisticated machines Deere provides. Historically, though, most sizable countries, including China, Russia, India, and Brazil, among others, have local farm equipment makers who make machines that are perfectly adequate for local needs and less expensive than Deere’s. As a result, in developing regions, Deere faces more competition than does Cat.

    Both companies are exceptionally well managed, with long-established Lean manufacturing practices that have resulted in continuous improvement in the efficiencies of their factories, offices, and capital consumption during the past three decades. There are no significant differences between them in the management arena.

    A final note: Caterpillar’s 178 global dealers are Cat’s most powerful competitive strength, something that by the nature of its business, Deere can’t match. Many Cat dealers are huge companies in themselves, with an aggregate net worth at the end of 2013 of $21.8 billion, or an average net worth of $122 million per dealer. Cat’s business, in which users of Cat’s equipment are often far from any population centers or even towns, lends itself to being serviced by large, well-financed dealers.

    The large dealer approach that works with construction and mining equipment does not work well with farm equipment, as Cat discovered when it tried to expand into farm equipment with a unique, internally developed rubber-tracked farm tractor called the Challenger, which Cat introduced in 1987. That business was never larger than about $500 million a year, and Cat sold it to AGCO (AGCO – 53.52) in 2002.

    One problem Cat had in farm equipment: except for giant corporate farms, most farmers prefer dealers who are relatively small and local, not half a state away and where the small and medium-sized independent farmer feels he’ll get the attention he needs.

    For example, if a combine breaks down during harvest, every minute the machine is down, the farmer is losing money. The farmer wants to know his dealer and the repair parts he needs are 10 minutes away, not 100 miles away, so he can get his machine repaired and running again in half an hour, not half a day.

    That means farm equipment companies are unable to develop networks of huge, powerful, well-financed dealers who can simply dominate the business. By nature, farm equipment distribution is more local and more competitive than construction or mining equipment distribution.

    Moreover, in its construction and forestry equipment business, the fact that Deere does not make either large construction machines or any mining equipment, means Deere’s line of small and medium-sized equipment lends itself to a network of small, local dealers instead of the large, dominant dealers in Cat’s business.

    Finally, Cat’s dealer network is the largest, most powerful, most dominant dealer network in the world, in any product line. A Cat franchise is a very valuable asset - owning a Cat dealership is a license to coin money. For that reason, Cat can exercise relatively tight control of its independent dealers, most of whom would not want to lose that franchise.

    BTW, the debt/equity ratios in your report are misleading. Would you buy a cyclical capital goods company with a debt-to-equity ratio of 187% or 341%, as you have shown for Cat and Deere, respectively? Of course not!

    Both companies own finance subsidiaries. You need to exclude the finance companies’ debt when you calculate the debt/equity ratios of the operating companies, otherwise the numbers are meaningless. For example, if we exclude Cat’s finance company debt, which debt is secured by the Cat equipment and other assets owned by Cat’s dealers and customers that Cat Financial has financed, Cat’s debt/equity ratio on 3/31/14 would be 43%, not the 187% you’ve shown (I don’t have Deere’s numbers handy).
    Jul 11 05:18 PM | 9 Likes Like |Link to Comment
  • Evaluating Caterpillar's Dividend Growth Potential [View article]
    Hayden: It’s you, not me, who suffers from confirmation bias. Why did you select Caterpillar’s (CAT – 109.04) retail machine sales in the Asia/Pacific CONSTRUCTION INDUSTRY to support your point? Because the change from up 12% in the 3 months ended March to down 8% in the 3 months ended May for Cat’s retail machine sales in the Asia/Pacific construction industry supports your point better than if you chose Cat’s TOTAL retail machine sales in Asia/Pacific, which were down 20% in the 3 months ended March and down 30% in the 3 months ended May.

    You conveniently ignored the fact that Cat’s sales in China are NOT by any means limited to the construction industry. Cat has large sales to the MINING industry in China as well, and yet despite the fact that Cat’s mining industry retail machine sales in Asia/Pacific were down 65% in the 3 months ended March and down 69% in the 3 months ended May, Cat’s sales to its dealers in China (which sales include both construction and mining equipment) were up 30%. Now go back and reread what I said.

    I’m using Cat’s retail machine sales in Asia/Pacific to help get a read on Cat’s MARKET SHARE in China, which share is going UP. Cat says its share is going up and the numbers show its share is going UP. If you want to be short Cat when its market share in the huge China construction and mining equipment market is going up, that’s your concern.

    You do understand, don’t you, that China is only one part of Cat’s Asia/Pacific sales. That limits our ability to measure Cat’s market share gain in China from Cat’s retail machine sales in Asia/Pacific, but we can get a strong indication, as I’ve shown in my previous comment at 4:30 pm, July 9.

    Cat’s share gain in China would be LESS positive if China’s construction equipment sales were booming, for one could then argue that the boom wouldn’t last, that sales of Cat’s relatively high priced machines were benefitting from booming profits in China’s construction industry, and that in the next recession in China’s construction industry, lower profits and cash flow will cause Chinese contractors to go back to buying lower-price-point equipment from Cat’s competitors.

    BUT SUCH IS NOT THE CASE!!! As you point out and as clearly shown in the CEIC graph you linked us to, Chinese construction equipment is NOT in a boom, it is very slowly coming out of a recession. But despite that very negative condition for Cat’s relatively high priced equipment, CAT IS GAINING SHARE, which share gain can only benefit as China’s construction industry continues to recover. Good luck to the shorts.

    Do you follow any of this? You sometimes seem incapable of grasping a simple logical argument or of reading graphs. As I said in my comment on July 9, the CEIC graph you linked us to clearly shows that China’s domestic construction machinery sales have been trending sequentially UP for the past 2 years and 3 months (February 2012 to May 2014). Readers, take a look!

    Again, China’s construction equipment industry is gradually recovering from a recession and Cat is gaining share of a rising total. Machines sold in the boom years of 2007-11 are wearing out and will need to be replaced, and when that happens, the recovery will accelerate.

    Regarding S&P’s global corporate capex study you linked us to: Did you read what I wrote? I didn’t discredit the forecasts in the S&P study, THE AUTHORS OF THE STUDY DISCREDITED THE FORECASTS IN THEIR OWN STUDY, WHICH FORECASTS CAME FROM THE COMPANIES THEY SURVEYED. I simply quoted what the authors said about those company forecasts – that in normal years, company forecasts of capex tend to be 5-to-10% too low, that in economic booms they have been as much as 25% too low, and that in recessions, they tend to be about right. There is nothing surprising about that, but it was the authors of the study who said that, not me. You apparently skipped that part of the study because it did not confirm your point.
    Jul 10 11:34 AM | 1 Like Like |Link to Comment
  • Evaluating Caterpillar's Dividend Growth Potential [View article]
    Hayden Cole: You will get brought up to date on July 24, when Cat reports its 2Q. In the meantime, be content with the fact that for the 3 months ended March 2014 (Cat’s 1Q), Cat’s retail sales of complete machines in its Asia/Pacific (A/P) region (including China), were DOWN 20% y/y, while Cat’s sales to its dealers in China were UP 30% y/y.

    Could it be that in the 1Q, Cat’s China dealers were simply building inventory, while their retail sales of Cat’s products were falling? That’s doubtful. Or could it be that in A/P, Cat’s retail machine sales in China are up strongly, as reflected in the 30% increase in its 1Q sales to China dealers, while the decline in Cat’s sales of mining machinery OUTSIDE China was more than offsetting. The 65% y/y decline in Cat’s retail machine sales of Resource Industries products (mining) in the 1Q seems to indicate that the 20% y/y decline in its 1Q retail machine sales in A/P was chiefly due to Cat's sales outside China.

    If so, does the 30% decline in Cat’s retail machine sales in A/P in the 3 months ended May 2014 indicate a sudden reversal in the strength of its sales to dealers in China – a sudden downturn in its sales to dealers in China? Highly doubtful.

    If you insist, here’s something you said that is not true:

    In your 8:51 pm comment on this thread July 3, you said that: “The only bright spot in NA construction but it's a fraction of their business - and yet it seems to be the only thing the market is focussed on.” By “the only bright spot,” I assume you mean the fact that in the 3 months ended May 2014, retail machine sales in North American (NA) Construction were up 17% y/y, with the next strongest segment being Latin American retail machine sales, up 12% y/y.

    Let me remind you of what I said in my answer at 1:48 pm on May 29 to a comment of yours on a May 22 article on Cat by “Winning Strategies” (see http://bit.ly/1nfavMp) – I said the following:

    “Moreover, the previous steep decline in Cat’s mining sales has reduced the impact of further declines. In Cat’s recent 1Q, of Cat’s $13.2 billion in sales and revenues, its Resource Industries segment was only 16% ($2.1 billion), compared with 39% for Construction Industries ($5.1 billion), 36% for Energy and Transportation ($4.8 billion), 4% for All Other ($0.5 billion), and 5% for Financial Products ($0.7 billion).”

    The aforementioned change in Cat’s product mix means that any further declines in its mining business (Resource Industries) will have a muted effect compared with increases in its Construction Industries, Energy and Transportation, All Other, and Financial Products segments, which together total 84% of Cat’s sales and revenues and which 84% of Cat’s sales and revenues is trending upward in demand and will continue to do so as long as world GDP continues to grow.

    Regarding the “fraction” of Cat’s 1Q sales accounted for by NA (North American) Construction, which segment you say is “the only bright spot [in Cat’s retail machine sales statistics]” in the recent 1Q, NA Construction was 16% of Cat’s total sales and revenues of $13.2 billion, or EXACTLY THE SAME PERCENTAGE of Cat’s total sales and revenues as Cat’s mining equipment business (Resource Industries). So, according to you, Cat’s mining equipment business (Resource Industries) is ALSO just a “fraction” of Cat’s business.

    In fact, in the 1Q, Cat’s NA construction sales were $2,092 million, up 36% y/y (up $552 million) and Cat’s Resource Industries sales (mining products) were $2,123 million, down 37% y/y (down $1,230 million). The balance of Cat’s 1Q sales and revenues (excluding NA Construction and Resource Industries) were $9,026 million, up 8.5% y/y (up $709 million) from $8,317 last year, so that total sales and revenues were virtually flat at $13,241 million this year, up $31 million from $13,210 million last year.

    Hayden, you will no doubt answer by pointing out that Cat’s 1Q sales were helped by dealer inventory increases of $700 million in this year’s 1Q, compared with dealer inventory reductions of $800 million last year, so that adjusted for dealer inventory changes, Cat’s total 1Q sales and revenues were actually down 10.5% y/y instead of flat ($12,541 million in 1Q 2014 vs. $14,010 million a year earlier). That is true, but it does not change the fact that the sequential trend of Cat’s non-mining sales and revenues (84% of the total), as opposed to the y/y comparisons, is UP and that the shrunken size of Resource Industries in the mix reduces the impact of further declines in that segment’s business.

    How do we know that the sequential trend of Cat’s non-mining sales and revenues is UP? Dealers, who have the best view of Cat’s end-market trends, would NOT have added $700 million to their inventories in the 1Q if the trend was flat or down.

    With the global economy continuing to grow, do Cat’s 1Q results, product mix, and dealer inventory trends say Cat’s overall business is trending up or down? Shorts are going to find that to their horror, the trend is UP.

    On your next point, you MUST know that the trend in Cat’s retail machine sales has NOTHING to do with the improvements in efficiencies and profit margins Cat has been realizing from continuous improvements in its Lean manufacturing practices. Those efficiency and margin improvements are NOT volume sensitive. Changes in efficiencies and profit margins caused by changes in volume are a whole separate calculation, as you must know. Therefore, you cannot “debunk” my statement about improvements in efficiencies and profit margins by talking about trends in dealer sales!

    You clearly know little about Caterpillar if you think Cat is merely going to be “tinkering around the edges of their dealer program.” Reducing variability is a key tenet of Lean Six Sigma. There is substantial variability in the performance of Cat’s 178 global dealers. Cat is going to reduce that variability by setting performance standards for its 178 dealers based on the practices and results of its most successful dealers (those with the biggest share of their respective markets). It will then migrate the practices of its most successful dealers to the REST of its dealers (which are the large majority).

    This is not a trivial initiative. This is a major improvement in Cat’s management of its global dealer network, one that should have a profound effect on the performance of the BULK of Cat’s dealers – those with performance that is currently average or below average. This is not PR. This program will happen, because it is a logical extension of Cat’s Lean Six Sigma continuous improvement practice, which, in 2005, former CEO Jim Owens dubbed the Caterpillar Production System (CPS), and which effort actually began at Cat in 1985 (that is another story). I have been studying Cat’s progress with Lean Six Sigma since 1985, and I can assure you, Cat’s new dealer initiative is likely to have a major impact on its market share.

    Cat is in a better position to enforce its new dealer initiative than most companies would be, because a Cat dealership tends to be a license to coin money. A Cat dealership is a highly profitable franchise that dealers are loath to lose. They will cooperate with Cat’s new program because it will not only help them grow their sales and profits, but also because they will have no choice, other than to give up being a Cat dealer.

    Finally, thanks for the link to S&P’s “Global Corporate Capital Expenditure Survey 2014.” Lots of interesting data and forecasts there. I hope those forecasts are better than S&P’s pre-2008, pre-financial-crisis AAA investment grade ratings on mortgage backed securities. BTW, NONE of what I have said comes from Cat, except the numbers Cat has already reported. Global economies are expanding. Forecasts of declining global capex will be wrong.

    And Hayden, you forgot to mention the 7th bullet point on the first page of that 30-page S&P report (the “Overview” section), which says the following:

    “Market analysts appear to systemically underestimate prospects for capex. Since 2007, there has been only one year – crisis-affected 2009 – when the final tally for capex was less than the initial forecasts for that year. In all other years, the outturn was at least 5% more than initially forecast and as much as 26% in boom years. This suggests scope for forecasts to improve. However, as much of the historic error was due to underestimating the boom in energy and materials capex, upward revisions in 2014-15 may have less scope to improve.”

    The authors of the S&P report on capex are telling you upfront their forecasts are likely to be too low! If you suffer from confirmation bias, you probably ignored that paragraph, as it does not fit your preconceived notions.

    Left unsaid on that page is the probable reason for underestimating energy and materials capex, which is that such spending is tied to notoriously hard-to-forecast commodities prices, while spending for infrastructure is tied to government budgets, spending for factory modernization and expansion is tied to economic growth rates and capacity utilization, and spending for non-residential building is tied to economic growth rates and vacancy rates, all of which factors vary in a comparatively narrow range and can be forecast with greater accuracy than can volatile commodity prices. For that reason, forecasters of energy and materials capex tend to use conservative forecasts of commodity price levels, which practice means commodity prices and related capex often exceed forecasted levels.

    Page 20 of the report, which you may not have gotten to, is titled "CONSENSUS FORECASTS UNDERESTIMATE CAPEX." It turns out the forecasts in the report are based on guidance and forecasts from companies themselves, not numbers generated by economic analysis. The chief author of the report, Gareth Williams, is quoted in a story in the June 30 issue of the Financial Times saying: "Companies themselves are often reluctant to disclose capital spending plans in great detail. But it's a mirror image of [analysts'] earnings and profit margin estimates, which routinely tend to be too high."

    Page 20 and 21 of the report go on to say that in 2007 and 2008, the tail end of the prior economic boom, actual capex exceeded prior forecasts by more than 25% and that for the other years of 2007-2013, except for 2009, actual capex exceeded prior forecasts by 5-to-10%.

    The analysis on pages 20 and 21 of the S&P report concludes by saying the data gathered for 2007-2013 "does suggest that analysts systematically underestimate capex by 5-10%.”

    The “Conclusions” section on page 21 of the S&P report on capex discusses in detail the tendency to underestimate capex, saying: “Our findings suggest a clear and repeated negative bias in market-consensus capex-forecasts. This would seem to offer hope that the outlook for medium term capex may be better than current numbers suggest.”

    Among the reasons the “Conclusions” section cites for the tendency to underestimate capex are: (1) a possible assumption of some degree of reversion to a lower average level of capex that the report says “is simply not warranted,” (2) the exclusion of cost inflation from the forecasts, which means inflation alone may cause capex to exceed forecasts, and (3) as mentioned by me earlier, “under estimation of the scale of a commodity boom,” as indicated by “the fact that materials and energy are the biggest sources of error [in capex forecasts].”

    The “Conclusions” section ends by saying: “Finally, we considered whether this clear bias – which will affect our second-year out estimate – means we should upwardly adjust our global capex projection accordingly. We decided not to do this as it would mean a relatively arbitrary forecast change which would be hard to justify systematically.” It goes on to say the authors did decide to shift to “nominal estimates for forward growth,” as it might offset the likely absence of inflation assumptions in figures from the capex analysts.

    The bottom line is that the S&P report on capex you cited does not support your thesis. Again, confirmation bias may have caused you to overlook or discount the paragraphs that say the forecasts in the report are most likely too low.

    Regarding your second link, I don’t know what you see in it, but the chart of China domestic machinery sales you refer to clearly shows the trend in China domestic sales of bulldozers, excavators, and loaders has been sequentially UP for the past 2 years and 3 months (February 2012 to May 2014). I expect the uptrend will accelerate as equipment sold in the boom years of 2007-11 wears out.
    Jul 9 04:30 PM | 1 Like Like |Link to Comment
  • Evaluating Caterpillar's Dividend Growth Potential [View article]
    Hayden Cole: Do you read? Cat's sales in China were up 30% year-over-year in the 1Q.

    You apparently know little about Cat or its industry. Little of what you said in your post is true. That's why Cat's stock hit a 27-month high of $111.16 today, up $1.52, and closed just $5.87 a share shy of its all-time high of $116.95 in February 2012.

    There are negatives, to be sure, but they are reasons to BUY the stock, not sell it, because those negatives will be substantially reduced or eliminated as the rest of this economic upcycle plays out during the next 3 or 4 years. The overall trend in Cat’s global business is up and its profit margins are increasing as a result of better factory utilization and greater efficiencies from the continuous implementation of Lean manufacturing practices (the Caterpillar Production System).

    Next year, Cat’s new initiative to reduce the variability in the performance of its global dealer network will kick in. Announced at CONEXPO in March this year, it’s a timetable of actions to migrate the best practices of its best dealers to dealers who are below average to raise the average performance of all Cat dealers and thus gain market share.

    You and Chanos are going to be toast on this one.
    Jul 3 11:27 PM | 1 Like Like |Link to Comment
  • Parker Hannifin Can Take Another Run At $130-Plus [View article]
    I might add that Parker’s acquisition opportunities in its field of expertise, motion control, are legion. The world market for motion control devices – hydraulic, pneumatic, and electro-mechanical – is roughly $100 billion a year, and although Parker is by far the largest company in this fragmented market, Parker’s annual sales of $13 billion is but 13% of the market.
    Jul 3 10:53 PM | Likes Like |Link to Comment
  • Parker Hannifin Can Take Another Run At $130-Plus [View article]
    I would add that Parker Hannifin (PH – 127.37) has one of the world’s most consistent dividend growth records. Read the following from Parker’s most recent dividend announcement on April 25: “This is the company's 256th consecutive quarterly dividend and results in a total distribution to shareholders of approximately $72 million. Parker has increased its annual dividends paid to shareholders for 58 consecutive fiscal years, among the top five longest-running dividend-increase records in the S&P 500 Index.”

    Parker intends to increase its dividend payout ratio from last year’s 27% to its target of 30%. Parker’s world class Lean manufacturing program, which during the past ten years of continuous improvement has helped Parker approach its goal of a 15% average operating margin over a cycle, has also helped Parker to cut its capital spending needs approximately in half – from what was once an average of 4-to-5% of sales each year to 2-to-2.5% of sales each year, a cash saving that has added hundreds of millions of dollars to Parker’s free cash flow the past several years and helped fund higher dividend payouts, share repurchases, and acquisitions.
    Jul 3 06:58 PM | 1 Like Like |Link to Comment
  • Evaluating Caterpillar's Dividend Growth Potential [View article]
    What will Caterpillar (CAT – 111.08) sell at if it reports EPS of $7 this year, $9 in 2015, and $11 in 2016? Earnings could be even better than that.

    Cat’s earnings and stock price never peak before the top of the cycle, and that top is years away!!! Since World War II, Cat’s average P/E on peak TTM EPS at the top of economic cycles has been 17. On a conservative $11 a share for the peak, that’s $187. Those are the most important items to keep in mind. Weight them heavily.
    Jul 3 06:07 PM | 1 Like Like |Link to Comment
  • Uni-Pixel Still Struggling To Advance From A Lab Experiment To A Sellable Product [View article]
    Adam: New management is reporting facts; reporting facts is NOT promotional.

    Under the new management, the company has not sold stock yet, but, in case you were not aware of it, new companies usually raise money by selling stock or bonds to investors. With $34 million in cash at the end of March 2014 and no debt, and a current “burn rate” of $6.2 million a quarter, if UNXL continues to have no sales and earnings, UNXL has about 5.5 quarters left before it has to go back to the well (raise more capital, either through borrowing or selling equity). With its expectation of a ramp to volume in the 2H of 2014, UNXL expects to be cash flow positive before it runs out of cash.

    Your comment that: “executives' stock-based compensation dwarfs their cash salaries” makes NO sense. Would you rather talented executives were paid what they are worth in CASH – scarce cash the company needs to survive – or paid in stock that won’t be worth anything unless the company succeeds?

    You are offering nothing more than your own speculation to support your opinion the company won’t succeed. And a $100 million market cap will be a pittance if UNXL becomes a significant supplier to the touch screen market. Do the math.

    Why the comparison with Quantum Fuel Systems (QTWW)? Because UNXL and QTWW have similar market caps? What’s your point? Quantum has sales, but UNXL doesn’t? But Adam, UNXL’s market cap is where it is because the market cap will be a LOT higher if UNXL becomes a significant supplier to the multi-billion dollar touch market. And, importantly, touch is a market the average person can understand – touch screens, which nearly everyone uses every day. The same cannot be said about Quantum Fuel Systems’ markets.
    Jul 3 05:55 PM | Likes Like |Link to Comment
  • Uni-Pixel Still Struggling To Advance From A Lab Experiment To A Sellable Product [View article]
    Adam: And like I said, the shorts like to bring up past events and past promises made by previous management – events and promises that have NO RELEVANCE to what is happening today. PREVIOUS MANAGEMENT WAS FIRED BECAUSE IT WAS, AT THE VERY LEAST, INCOMPETENT. Get over it!!! Address your comments to what is happening TODAY, with a management that brings a whole different level of skill to the problems of bringing this technology to market.

    Neither you nor I know if new management will be successful, but, in any case, what previous management did tells us nothing. Why do you keep bringing it up? Current management clearly likes to understate. Don’t be surprised if there are some positive surprises.

    Your stated reason for shorting UNXL makes little sense to me. The current market cap of roughly $100 million will be a bargain if the product is successful and will only be too high if the product fails. Your short is a bet the product either fails or can’t be economically produced in volume. It’s not a bet the market cap is too high.
    Jul 1 01:31 PM | Likes Like |Link to Comment
  • Uni-Pixel Still Struggling To Advance From A Lab Experiment To A Sellable Product [View article]
    Adam: One hesitates to offer an opposing view to someone with a 90%+ success rate with his short ideas on this site, as you reveal in your profile. However, I do wonder why someone as talented as yourself is content to play the short side most of the time. For example, you could have bought Uni-Pixel (UNXL – 8.04) in size at $5.25 on its August 9, 2012 secondary offering and sold it for as much as $41 and change in April 2013, nearly an 8 bagger in just over 8 months, which given your superior understanding of the company and your insight into the future for the company, you could easily have done. Instead, you waste your talents going short the stock, where the most you can make is 100%. Who knows, however, perhaps you did go long before you went short. If so, congratulations.

    Nonetheless, I believe there is a high probability you will be wrong on this short idea. Rather than repeat myself here, I refer you and readers to my many comments on the previous article on this site, “An Update Of Uni-Pixel’s Production Status (UNXL),” June 17, 2014, by Richard X. Roe. To read them, click on the word “Comments” under my screen name above.

    Mr. Roe’s predictions of what UNXL would say on June 25 turned out to be woefully wrong. On June 25, UNXL announced it had met the milestones and timetable it had guided investors to in its 4Q 2013 earnings release and conference call last February 26. There was no change in that guidance and no delay, no matter what the shorts would like readers of this thread to believe. The shorts like to refer to outdated guidance given at various times in the past by previous management who are no longer with the company, because new management (Jeff Hawthorne) is meeting its commitments, which is not good for the value of the large short position in UNXL.

    Your article is primarily speculation, based on UNXL’s disclosures to date. You assume management has told us all it knows, and you go from there. Unlike the previous management, however, this new management plays it close to the vest, and wants to talk about milestones it has REACHED, not speculate about the timing of milestones it plans to reach. So watch out, you might just get surprised.

    I like the Tesla analogy offered by punjabiB&B on this thread at 7:15 pm on June 28.
    Jun 30 08:08 PM | Likes Like |Link to Comment
  • An Update Of Uni-Pixel's Production Status [View article]
    Readers, pay no attention to these posts by RXR or his article; most of what he says is ludicrous. Under its new management, which have good reputations from their previous employments, Uni-Pixel (UNXL – 7.59) is not lying.

    UNXL is NOT paying Kodak – UNXL and Kodak are sharing equally in the investment needed to set up production of UNXL’s product line at Kodak’s Rochester plant, which capital spending amounts were announced last year to be $12 million from each company for 2013, for a total of $24 million. The capital spending for the project in 2014 has not been disclosed.

    Kodak was NOT expecting to be in production in the 2Q; as I have detailed earlier, that expectation was SUPERSEDED by the guidance UNXL disclosed in its February 26, 2014, 4Q earnings release and conference call. In his utilization of the “straw man” approach to misinforming you, RXR uses earlier and out-of-date guidance to try to convince you there has been another failure and “delay,” when, in fact there has been NO delay. As UNXL detailed on June 25, the project has met the guidelines, timetables, and milestones established on February 26. Don’t listen to RXR.

    UNXL is under new management and is benefitting from Kodak’s film production expertise. History tells us nothing.

    Kodak is not on the inside? That assertion by RXR is ludicrous. Kodak is intimately involved in this project and has been since it approached UNXL about UNXL’s film products 2 ½ years ago. Kodak’s history with touch products tells us nothing, as the expertise in touch, per se, is with the new management at UNXL (check their backgrounds in the announcements of their hiring on 4/14/14, 4/29/13, and 2/19/13, respectively, on the UNXL website at http://bit.ly/1m20AsW).

    And before RXR interjects that 2 ½ years without volume production argues that the UNXL approach won’t work, let me say if the current management team at UNXL had been running things for the past 2 ½ years, instead of the past 2 months, progress would have been a whole lot faster.

    RXR apparently did not hear UNXL say on its June 25 update call that the modifications to the plating process UNXL and Kodak have developed at UNXL’s Lufkin site this year are being transferred to the Kodak site in Rochester as we speak. The idea that Kodak knows nothing about the plating process because the modifications took place at UNXL’s Lufkin plant is also ludicrous. RICHARD, these two companies are working TOGETHER on this project. Don’t you get it?

    RXR is up to his mind reading tricks again when he tells us UNXL damaged its relationship with Intel this month. He has provided nothing but speculation about this - no hard evidence.

    To read what was actually said on UNXL’s June 25 call, go to the transcript at: http://seekingalpha.co...
    Jun 27 01:05 AM | 1 Like Like |Link to Comment
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