Is Caterpillar Heading South for the Summer?

With shares of Caterpillar Inc. (NYSE:CAT) trading at around $85.99, is CAT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Caterpillar is often used as an indicator of the status of the global economy. If that’s the case, then the global economy isn’t looking so hot at the moment. Here is a long list of negatives for Caterpillar:

  • Global sales down 13 percent in the three months ending February 2013
  • Three consecutive months of declining sales
  • Declines in sales have been accelerating
  • Rising inventories
  • 12 percent annual sales decline in North America
  • Weak construction equipment market in Asia
  • Weak demand for mining equipment
  • First quarterly revenue drop since March 2010
  • Weak guidance
  • Declining backlog
  • Weak demand in Europe

The words “weak” and “declining” are popular themes in that list, and they’re not words that any prudent investor wants to be associated with. The one shining light for Caterpillar has been Latin America, where it’s seeing 3 percent growth. Otherwise, Caterpillar is now focusing on cutting costs opposed to growth. And employees are the biggest victims. Caterpillar has been more than willing to strike heavy blows with its axe.

For FY2013, Caterpillar is expecting EPS of $7.00 to $9.00 on revenue of $60 billion to $80 billion. If both numbers came in at the middle of those ranges, revenue would improve while EPS would decline.

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The chart below compares fundamentals for Caterpillar, Joy Global (NASDAQ:JOY), and Deere & Company (NYSE:DE). These three companies differ in size. Caterpillar has a market cap of $56.54 billion, Joy Global has a market cap of $6.06 billion, and Deere has a market cap of $33.96 billion.

CAT

JOY

DE

Trailing   P/E

10.18

8.01

10.90

Forward   P/E

9.26

8.91

9.80

Profit   Margin

8.62%

13.43%

8.64%

ROE

36.94%

29.19%

44.68%

Operating   Cash Flow

$5.24 Billion

$551.86 Million

 $1.15 Billion

Dividend   Yield

2.50%

1.20%

2.40%

Short   Position

3.30%

5.60%

2.50%

 

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Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Weak   

The debt-to-equity ratio for Caterpillar is weaker than the industry average of 1.40.

Debt-To-Equity

Cash

Long-Term Debt

CAT

2.28

$3.32 Billion

$40.15 Billion

JOY

0.50

$269.89 Million

$1.35 Billion

DE

4.36

$4.18 Billion

$32.65 Billion

 

T = Technicals Are Weak  

Caterpillar has performed well over a three-year time frame, but the past year has been weak.

1 Month

Year-To-Date

1 Year

3 Year

CAT

-5.69%

-4.04%

-13.08%

41.23%

JOY

-9.72%

-12.36%

-23.24%

-5.00%

DE

-3.88%

1.71%

15.29%

50.72%

 

At $85.99, Caterpillar is trading below all its simple moving averages.

50-Day   SMA

91.12

100-Day   SMA

90.34

200-Day   SMA

87.99

 

E = Earnings Have Been Steady             

Revenue and earnings have consistently improved on an annual basis, but these trends are now at risk.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

51.32

32.40

42.59

60.14

65.88

Diluted   EPS ($)

5.66

1.43

4.15

7.40

8.48

 

When we look at the last quarter on a year-over-year basis, we see a decline in revenue and earnings. There have also been declines in revenue and earnings on a sequential basis.

12/2011

3/2012

6/2012

9/2012

12/2013

Revenue   ($)in   billions

17.24

15.98

17.37

16.44

16.08

Diluted   EPS ($)

2.33

2.37

2.54

2.54

1.03

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

Demand has weakened in Asia, Europe, and North America. There are no signs that these trends will suddenly reverse course.

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Conclusion

A stock market that only moves in one direction is an unhealthy market. If a steep correction were to take place, Caterpillar wouldn’t be a safe option. The stock was hammered during the financial crisis of 2008/2009, and it would likely be hammered again in a similar environment.

From a business standpoint, Caterpillar is a great company that will be around for a very long time, but industry trends might be heading toward the most challenging industry trends Caterpillar has ever faced.

This is the only stock covered in this column that has gone from OUTPERFORM to WAIT AND SEE, and now to STAY AWAY over the past four months.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I am short technology, financials, the Russell 2000, and the euro.

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