Thursday, 24 September 2015

Caterpillar's calamity

So what to make of today's update from Caterpillar?  To quote directly from the company's statement:

'For 2015, the company’s sales and revenues outlook has weakened, with 2015 sales and revenues now expected to be about $48 billion, or $1 billion lower than the previous outlook of about $49 billion. For 2016, sales and revenues are expected to be about 5 percent below 2015'
And obviously with an operationally geared business...this is not good news (by the sound of the statement the impact on profitability on the full year will be made apparent at the next quarterly update).  Unsurprisingly a bunch of cost reduction initiatives have been enacted in these clearly quite extraordinary times:
'This year is the company’s third consecutive down year for sales and revenues, and 2016 would mark the first time in Caterpillar’s 90-year history that sales and revenues have decreased four years in a row'
As a business Caterpillar is clearly a survivor with high market shares (they note gross margins are 'right in line' with their highest level in 20 years), double digit sequential increases in the company's dividend over each of the last three years (yielding just over 4% currently) and US$8.2bn worth of share repurchases over the same period (cumulatively equivalent to just over 20% of the company's market cap).  Of course all of this is historic and not forward looking but it shows some inherent capabilities. As the company themselves note: 
'we believe Caterpillar will be well positioned to deliver solid results when these industries recover and demand improves'
Clearly we can chalk up another victory for the impact of lower economic growth crowd (and let's face it when the miners and related are all cutting capex aggressively Caterpillar is going to be impacted)...but what price do you buy Caterpillar shares?  At the current US$65s share price they are at a level last seen in 2010 as the company entered a second year of recovery after the dire impact of the global financial crisis of 2007-9: 

Clearly forward earnings are hard to currently judge and Yahoo Finance's current x15 forward P/E will probably expand a little.  P/Es and cyclicals are always a difficult subject (buy on big forward numbers, sell on smaller ones etc.).  A 5% headline dividend yield (I think the buybacks are culled but the dividend stays) would imply sub US$60 as of greater interest - especially as surely the biggest specific driver to the business of higher commodity prices also would support names such as BHP Billiton or Chevron with current higher/larger yields and probably slightly better balance sheets.  As an aside book value is of little help (US$28s).  

Gut feel, wait for (1) the updated FY15/FY16 guidance and; (2) a sub US$60 share price.  Higher commodity prices tomorrow would push the share up but today I would prefer to focus in the commodity/cyclical related space on some of the aforementioned names in the paragraph above with yield and good balance sheets in these out-of-favour parts of the market.  

And as the share price chart above shows hope that QE and related can help avoid a re-run of the 2008 scenario because then a 5% headline yield on Caterpillar shares is not going to help you...

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