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Has Caterpillar Peaked?

Feb. 07, 2019 4:33 PM ETCaterpillar Inc. (CAT)GE, SIEGY, SLB30 Comments
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Shock Exchange


  • CAT's Q4 revenue grew by double-digits. Energy & Transportation growth was a pleasant surprise.
  • Profit margins for Construction and Financial Services ticked down. This could be the canary in the coal mine.
  • In my opinion, the global economy is not strong enough to warrant an investment in CAT.
  • Sell CAT.
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Caterpillar equpiment. Source: CaterpillarCaterpillar equipment. Source: Caterpillar

The U.S. economy has been on an upward trajectory for over a decade. At some point what goes up must come down. However, President Trump believes the economy is strong and has more room to run. Sans more government stimulus, I believe the economy will begin to show cracks. That's why the earnings of cyclical names like Caterpillar (NYSE:CAT) are so important. They arguably could give an indication on just how strong (or weak) the economy truly is.

Caterpillar manufactures everything from earth-moving equipment to equipment to oil and gas equipment. At some point its revenue and income streams could be impacted by the vagaries of the global economy.

Caterpillar's Top Line Growth Remains Impressive

Despite my prognostications about the global economy, Caterpillar's revenue growth has been impressive. Q4 2018 revenue of $14.3 billion was up 11% Y/Y. This was less than the 18% growth reported in Q3 2018. With Caterpillar's sizable revenue base, one would expect its revenue growth to slow. On a sequential basis, revenue growth was only 6%. I expect Caterpillar's revenue growth to eventually slow into the single digits over the next few quarters.

Caterpillar Q4 2018 revenue growth

Construction is Caterpillar's largest segment at about 39% of total revenue. Its revenue grew in the high single-digit range while the other two operating segments both grew by double-digits. The lion's share of Construction's revenue growth was derived from North America, which was up 17% Y/Y. North America was driven by higher demand for new equipment, of which about half was due to an increase in dealer inventories. Oil and gas activities and non-residential building construction were catalysts during the quarter. They could remain catalysts until the market realizes there may not be enough demand to justify such business fixed investment.

Construction's sales in Europe, Africa and Middle East ("EAME") rose

This article was written by

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The Shock Exchange has a B.A. in economics and MBA from a top 10 business school. He has over 10 years of M&A / corporate finance experience. Currently head the New York Shock Exchange, financial literacy program based in Brooklyn, NY.His book, "Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead", predicted pain ahead for the U.S. economy and financial markets.In 2014 the law firm of Kirby, McInerney, LLP brought a class action lawsuit against Molycorp, Inc. for "materially misleading statements" in its financial statements. Kirby, McInerney used investigative journalism from the Shock Exchange to buttress its case. That's the discipline the Shock Exchange brings to every situation he covers for SA.

Analyst’s Disclosure: I am/we are short CAT, GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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