Monday, 27 January 2014

CAT: a share price >US$90 says this...

The last time I wrote about Caterpillar I noted their cautious comments at the last set of quarterly numbers in October and that since then mining companies like Rio Tinto had talked more about capex control. 

I am loathe to say 'what a difference a quarter makes' because looking through Caterpillar's Q4/FY results today, I am not sure that it does.  Big picture the world remains mixed and difficult (with my emphasis added):

'Sales and revenues for full-year 2013 were $55.656 billion, down 16 percent from $65.875 billion in 2012.  The decline in sales and revenues was primarily driven by a sharp drop in sales of new machines for mining'

And this continues into 2014:

'We expect sales and revenues in 2014 to be similar to 2013...The outlook for 2014 includes continued cost improvement, but little price realization (less than 0.5 percent), a continuing negative mix of sales and a higher tax rate...we expect mining companies will remain cautious with equipment investments and are expecting another decrease in mining capital expenditures for equipment in 2014'

So far, so akin to the tone of the October statement and the December update linked above.  So why is the share called up 6%+ in the pre-market?  The key big positive was this:

'With the expected completion of the current $7.5 billion stock repurchase program, the Board of Directors has approved a new $10 billion stock repurchase program, which will expire on December 31, 2018'.

Just to put that into context, US$10bn is equivalent to 18% of the company's market cap.  That's a pretty clear statement of intent to the market. 

Now not all companies can do this but, with the company's debt-to-capital ratio at its lowest point in more than 25 years, CAT has greater flexibility than others.  That's great news for EPS enhancing moves such as a buyback. 

Looking at the share price over the last 3 years, the early US$90s level that the share looks set to open up at today is an important level.  For the share to stay in the US$90s it means that optimism about the world's economy - as discounted by the stock market - is more than just reasonable.  Have an alternative view?  Then take the lesson of history and short the shares...

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