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Caterpillar cycles

 

Summary (from latest annual report)

  • Total stockholders' equity : 13.13 billion USD
  • Market Cap is 59.80 billion USD ( last price of the stock is 101.54 USD)
  • Caterpillar Inc manufactures construction & mining equipment, diesel & natural gas engines, industrial gas turbines and diesel-electric locomotives. Its business segments are Construction Industries, Resource Industries and Energy & Transportation.
  •  Total stockholders' equity has decreased from 14.80 billion USD in 2015 to 13.13 billion in 2016 (from latest 2016 annual report)
  • Company has 7.16 billion USD in cash on account (from latest annual report)
  • Company has 17.47 billion USD treasury stocks
  • In 2016 company had 22.75 billion USD long-term debt, short – term debt was 13.96 billion USD (In 2015 company had 25.17 billion USD long-term debt , short-term debt was 12.84 billion USD)
  • Company's revenue decreased in 2016 to 38.53 billion USD from 47.01 billion in 2015
  • Net loss in 2016 was 67 million USD, Net income in 2015 was 2.1 billion USD
  • In 2016 company paid 1.79 billion USD dividend to its shareholders
  • In last five years, CAT has invested 18.95 billion USD on capital expenditures

 

Opinion about the company

Fundamentally it is a good company and in the future we can expect its growth (Total debt is very big (36.71 billion usd), big amount of cash on company's account, ROE is around -0.5 %).

 

The price of the stock is moving in "uptrend" but the risk/reward is currently unattractive

With 2016 sales and revenues of $38.537 billion, Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.  The company principally operates through its three product segments - Construction Industries, Resource Industries and Energy & Transportation - and also provides financing and related services through its Financial Products segment. Caterpillar is also a leading U.S. exporter.  Through a global network of independent dealers and direct sales of certain products, Caterpillar builds long-term relationships with customers around the world.

Sales and revenues for 2016 were $38.537 billion (41% of total revenues are from the US), down $8.474 billion, or 18 percent, from $47.011 billion in 2015. Sales declined across the company reflecting weak end-user demand in most of the industries they serve including in construction, oil and gas, mining and rail. A loss of $67 million was incurred in 2016, compared with profit of $2.512 billion in 2015. The decline was primarily due to lower sales volume , the unfavorable impact of higher mark-to-market losses related to remeasurement of their pension and other postemployment benefits (OPEB) plans, unfavorable price realization and a goodwill impairment charge in Resource Industries . These unfavorable items were partially offset by lower costs resulting from restructuring and other cost reduction actions.

Construction Industries’ sales were $15.612 billion in 2016, a decrease of $2.185 billion, or 12 percent, from 2015. Resource Industries’ sales were $5.726 billion in 2016, a decrease of $2.013 billion, or 26 percent, from 2015. Energy & Transportation’s sales were $14.411 billion in 2016, a decrease of $4.108 billion, or 22 percent, from 2015 (Sales decreased in all applications with oil and gas and transportation representing nearly 80 percent of the Energy & Transportation decline).

Results for both 2015 and 2016 included significant restructuring costs and 2016 also included three large non-cash items:

  • Restructuring costs were $1.019 billion in 2016, or $1.16 per share, compared with restructuring costs of $898 million in 2015, or $0.98 per share
  • Mark-to-market losses related to the remeasurement of their pension and OPEB plans were $985 million in 2016, or $1.15 per share, a significant increase from mark-to-market losses in 2015 of $179 million, or $0.19 per share
  • Results for 2016 included a goodwill impairment charge in Resource Industries of $595 million, or $0.98 per share
  • Results for 2016 included a $141 million charge to increase deferred tax valuation allowances, or $0.24 per share

Caterpillar increased guidance for 2017: Full-year earnings of $3.75 per share excluding restructuring costs (vs. $2.90 per share). Revenues are expected to be around $38B-$41B. Excluding restructuring costs, Q1 2017 profit per share was $1.28, double first-quarter 2016 profit per share excluding restructuring costs of $0.64 per share.

 

Technical analysis

Shares of Caterpillar had a good run in 2016. When we look at two years chart we can see that price of CAT is moving in "uptrend". As long the price is above this trend line and 90 USD this stock is in the "BUY" zone and there is no indication of the trend reversal. If the price falls on the trendline and if we get "bullish" confirmation candle it would be a very good entry point for short-term traders who are trading with "stop loss" and "take profit" orders. Trend line and 90 USD represent very strong support levels, if the price breaks this trend line and 90 USD it would be a very strong "SELL" signal and we have an open way to 80 USD ( this is also very strong support level). If the price jumps above 105 USD (short term resistance level) that would be a confirmation of "BULLISH" trend and open way to 110 USD.

 

Conclusion - risk/reward is currently unattractive

Shares of Caterpillar had a good run in 2016. Caterpillar is a cyclical company that benefited enormously from the mining and energy boom which unfolded but cycles in this industry are long because of the long life cycle that Caterpillar products have. In theory, it should expand at the bottom of the cycle - and there's little doubt Caterpillar's business is at or near that bottom. CAT trades at more than 26x updated 2017 adjusted EPS guidance and according to analysts, the stock is somehow overvalued. Restructuring costs now are guided to $1.25 billion this year, up $750 million after the company decided to close two more major plants. Positive thing is that Caterpillar increased guidance for 2017: Full-year earnings of $3.75 per share excluding restructuring costs (vs. $2.90 per share). Revenues are expected to be around $38B-$41B. My opinion is that there are a number of pitfalls ahead for CAT, but a s long as the macro situation and the broad markets stay reasonably positive, there's going to be a fundamental bull case to be made for CAT. CAT stock price is correlated with the situation in the USA, the global economic situation also affects the price of this stock (especially stock markets in the USA..). Technically looking I see limited upside and my opinion is that price of the stock is little overvalued, the risk/reward is currently unattractive (although I think that this is a good company).

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