Caterpillar Incorporated (CAT – Free Caterpillar Stock Report) is the world’s largest producer of earthmoving equipment. This entails road building, mining, logging, agriculture, petroleum, and general construction. The company is probably best known for its tractors, but it also makes scrapers, compactors, loaders, off-highway truck engines, pipelayers, and lift trucks. Its stock is a bellwether for the global economy in general and on the industrial front, particularly here in the United States. Performance of late has taken a hit due to a myriad of issues that we will discuss below. Using the latest Value Line report we will see if it is worth an investment at current price levels. With that in mind, the quotation as of this writing is close to the stock price that appears at the top of the aforementioned page.
Let’s start by taking a look at the Quarterly Sales Box at the lower left-hand side of the page. A glance here shows that revenues for 2016 are set to decline sharply. Clearly, this is not an ideal situation. Soft global demand for its construction offerings, coupled with the fact that CAT is a United States company operating at a time when the dollar is relatively strong, is hurting the top line. Investments in energy projects are off significantly, and orders for new machinery have fallen in tandem. The kinds of companies launching these plans like stability, and the global economic landscape has a number of serious concerns at this point. Take, for example, China. There, a sharp dip in construction activity has encumbered economic gains. Sales for Caterpillar in that country were down 25%, year over year, during the March quarter of 2016. Add to this uncertainty the recent turmoil over the Brexit decision and the situation becomes even more clouded. For these reasons, our 2017 sales estimate calls for an addition falloff to below $39 billion annually. From a historical perspective, CAT’s yearly sales topped out at just under $66 billion in 2012. Each year’s sales tally is available within the Array, which is located in the middle of the Value Line page.
One section below the Quarterly Sales Box is the Earnings Per Share Box. Here, we see that earnings were flying high in 2014, reaching a total of $6.37 a share. Then, when revenues began to slide, so too did profitability. Presently, our calls are for earnings of $3.55 this year and the exact same amount in 2017. Zero growth is not a desirable investment statistic, but it needs to be noted that, in a revenue decreasing environment, management is using all the levers at its disposal to keep profits at that level. Restructurings, cost cutting, and the like can only do so much and last so long. Eventually, the situation should turn around and the skies overhead will brighten. Our 3- to 5-year Projections located on the right side of the Array depict just that; by that timeframe we anticipate revenues will recover to more than $52 billion and that will translate to earnings per share of $7.50. Such figures are then used to calculate our Target Price Range out to 2019-2021.This bracket is located just below the company name and Timeliness Box in the upper left hand corner of our page. Using the May 20th report, appreciation potential from the recent price point is about average. Therefore, given the risks that Caterpillar faces due to the global economic uncertainty, we would suggest that long-term investors remain on the sidelines, for now.
Another knock against Caterpillar is its lofty debt burden relative to other industrial conglomerates in the Dow 30. Moving to our Capital Structure Box in the middle of the left-hand column of the page, we see that the debt-to-capital ratio as of March 31st, 2016 was 63%. We are not in the same boat with the bears on this line of thinking. CAT has a capital intensive business and has carried a debt burden of over $20 billion since the onset of the financial crisis in 2008. The debt does not constrain operations and management has been able to make numerous moves, whether that be via share buybacks or acquisitions, despite the burden. Too, the company’s Financial Strength Rating remains at an A+, just a notch below our highest designation for that metric. It is also worth noting that we anticipate that debt levels will remain at or near current figures for the duration out to 2019-2021.
So clearly, the long term should be better for CAT, but what about the near term: the period spanning the coming six to 12 months. A look at the Timeliness box in the upper left hand corner of our page shows that we have this stock ranked 3 (Average) for Timeliness at this time. Moreover, in the Commentary section of the page, Value Line’s top analyst Dominic B. Silva points out that “Caterpillar stock has come back nicely of late….but the near term may still prove to be quite volatile”. Yes, the stock is trading well above its 52-week low of $56.40 a share this year, but nowhere near the all-time high set in 2012 that was just below $117 a share. All historical high/low price points are available at the top of the Array in the High/Low section just above the Price Graph. Basically, what we gather from this is that the issue is not cheap at the moment, even though the company is struggling with its results. Since this may not be the most opportune time to get in, investors should wait for a more appealing entry point to present itself.
All hope is not lost, however. There is one characteristic of CAT that is highly recommended to a certain portion of the investment community. Looking at our Top Label, one can see that the Dividend Yield is north of 4%, well above the Value Line median of 2.5%. Based on the strong financials discussed above, the security of this payout is not in question. Also, it has steadily risen for a number of years. Due to this, income-minded investors have a draw here. Further, those seeking total return out to decade’s end may want to get involved. Caterpillar’s metamorphosis into to a fast-growing company may be long in the rear-view mirror, but those displaying patience out to 2019-2021 should be handsomely rewarded with current income and some appreciation potential along the way.