Is CAT Nothing But The Dow's Most Overpriced Dog?

Dow Jones industrial staple Caterpillar, better known as CAT, has made these pages quite often in the past few months for all the wrong reasons: be it due to operational weakness ("CAT Misses Across The Board, Slashes Sales And Profit Outlook"), weak top line growth ("Collapse In Caterpillar North American Sales Not Helping Bernanke's "Recovery") or simply gross management negligence ("Caterpillar Punked By Chinese Fraud, To Write Off Half Of Q4 Earnings"). It got so bad that none other than China permabear Jim Chanos declared Caterpillar his "best short idea" last week. However, CAT's troubles are far more than just China related as today's June dealer retail sales showed, which which posting a modest 'increase' in North American sales (from -16% to -10%), the weakness has returned to Asia where sales resumed sliding from -14% to -21%, in Latin America where growth plunged from 22% to 9%, in the ROW where sales dropped from -2% to -8%, all of it resulting in yet another downward inflection point in world sales from -7% (which had been a four month high) to -8%. But why bore with words when one picture should suffice.

So what is the future for CAT? According to a new report released by @VolSlinger, things may get far worse in the coming months. So bad, in fact, that based on his analysis, which has a price target of $28 for the stock, there is some 67% upside to a short position. And while the bear thesis here, for those inclined to not look at the world with rose-colored glasses, has been largely known, his "short" highlights are the following:

  • Generates no free cashflow, unless via borrowing
  • Uses questionable revenue recognition to its own foreign subsidiaries using borrowed money for sales that do not end up at a dealer or end user
  • Will NOT be able to materially raise its dividend moving forward
  • Uses imprudent and aggressive economic forecasting as an excuse to stuff the channel and level load production to attempt to meet guidance
  • Is in the middle-innings of a multi-year capitulation of mining capex
  • Has completed $9B in failed (including one fraudulent), value-destroying acquisitions since 2010 to try and meet long-term earnings forecasts – and still can’t  meet those forecasts.
  • Very rarely mentions their own large financial subsidiary, which we believe will magnify its earnings downturn and impair cashflow moving forward
  • Has compensation targets mis-aligned and far beneath management’s guidance and stated goals

For much more on the reasoning why CAT may be the biggest dog of the Dow Jones Industrial Average in the near-future, read the full report.

Caterpillar thesis (pdf):


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