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Caterpillar - High Uncertainty, High Valuation

Jul. 17, 2017 9:12 AM ETCaterpillar Inc. (CAT)6 Comments
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Kenra Investors


  • Caterpillar shares have been trending up despite significant deterioration in revenue and GAAP margins.
  • The stock is also showing a low correlation with crude oil compared to its history.
  • There is a high level of optimism priced into the stock at the current levels, and risk looks skewed to the downside.

Source:Company's Website

Financial Trends And Valuation

It’s well known to any investor who has taken a look at the company’s financials that Caterpillar (NYSE:CAT) stock has shown some significant non-fundamental trading. Caterpillar’s revenue and GAAP margins have been declining for several years but the stock kept going higher and higher. Although I have been following the stock for a while, I have always been amazed by how the market could send the stock higher and higher even without and a strong sign of operational improvements.

Let’s consider what happened between 2012 and today. Revenue declined from $65,872 million to $38,898 for the TTM, marginality fell sharply and net income went from $5,681 million to negative territory. In the charts below, you can see this trends.

ChartCAT Revenue (TTM) data by YCharts

The strange thing is that, despite the strong deterioration in basically every metric in the income statement, the stock’s valuation didn’t suffer at all, and it’s actually at the highest levels in the last 25 years. price to sales or EV/revenue were not affected at all by the deterioration in profitability, a clear indication that the market does believe that all, or almost all, the current weakness in margins is just a result of temporary phenomena and non-recurring charges, or that the market is willing to ignore the fundamentals. Despite the recent weakness, it seems that the market is expecting Caterpillar’s future to be brighter than ever.

ChartCAT PS Ratio (TTM) data by YCharts

It’s true that market valuations discount future developments, and any analysis that is based purely on past events wouldn’t be very useful, but seeing CAT's valuation multiples at all-time highs while the company is reporting such poor margins does give us a reason to be a bit skeptical. I used multiples based on revenue so that we can

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Kenra investors is a 5-star financial expert according to Tipranks and is constantly in the top 5%-10% of world financial experts.Thanks to the experience gained in almost 10 years of activity and study in the stock market and 5 years in professional equity research, I have developed a very sound understanding of many aspects of business, finance and investing. My approach is based on combining fundamental, technicals and macro to deliver meaningful outperformance. I am always open to considering professional collaborations or formal employment opportunities in equity research and/or portfolio management globally. For any purpose, you can message me here on Seeking Alpha or send an email to kenrainv@gmail.com

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