Caterpillar
A conditional sell pitch
by Ryan Dombrowski
Business Description
● From Hoovers:
Whether digging, loading, paving, or moving,
Caterpillar does it all. The company is the world's #1 manufacturer
of construction and mining equipment, It also
manufactures diesel and natural gas engines, industrial
gas turbines, and diesel-electric locomotives.
Things to Consider
● CAT’s business is highly levered to the global economy
(beta = approximately 1.8)
● Core Operations are levered to emerging markets,
especially China (approx 70% of revenue is from
outside the US)
● Any weakness in the mining sector should be viewed as
weakness for CAT (CAT supplies the machinery)
Copper/CAT Correlation
China/CAT Correlation
Technicals
Fed Tapering/EM
● Negative impact on EM if/when Fed tapers
http://www.bloomberg.com/video/imf-emerging-markets-hithard-by-taper-talks-Ddwm9amtQMaX1TyeOeWLgw.html
SWOT
S: 7/29/13- $1 billion accelerated stock
buyback
W: 20% declines forecast in Mining CapEx in
2014
O: world economic growth continues ->
commodity production increase -> more CAT
equipment needed
T: slowdown in growth rate of China -> less
need for CAT’s machines
With that in mind...
From JPMorgan:
“Our Overweight rating on CAT is predicated on the company’s
long-term growth prospects and exposure to global GDP, which
we believe will be positive over the long run, as emerging markets are
likely to continue to outgrow developed economies for the
foreseeable future, driving incremental demand for hard
commodities. In the near term, the macro-environment remains
sluggish, with upside potential going forward from a slow improvement in
Europe; the company still faces excess supply across several end
markets, but we believe that most of the downside risk has been
priced into the stock at this point, and that risk/reward
favors owning the stock.”
JPMorgan has an Overweight rating w/ a$96 price target.
Not so fast...
From JPMorgan:
“If the lack of macro visibility persists, multiples may remain
compressed, which could result in our price target being too high. A
slowdown in spending by mining customers following 7
years of investment well above the prior cycle is weighing
on the stock, and may continue to do so into 2014. Increasing
interest rates could also slow the pace of capital
expenditures, and therefore revenues could disappoint
into 2014.”
Conclusion
● I DO believe that JPMorgan’s price target is
too high and I am proposing that upon your
approval, IPO put in a sell order for CAT.
Any Questions?