Outlook for CAT seems Bearish.

Caterpillar (CAT) news recently came in when it announced that it is going to sustain the cash dividend for the current quarter. The dividend per share of CAT is $60 cents per share of common stock. The company declared that it generated a record cash flow in FY13 making its balance sheet reflect the best fundamentals since 25 years. The company also repurchased a total of $1.7 billion worth of shares making it the largest quarterly share buyback program they have ever had.

Revenues for CAT for 4QFY13 were $14.4 billion, which were down from the year ago quarter by 10.4%. However, Net operating expense in the same period was $2.4 billion declining by 23% from the year ago quarter. This contributed majorly in a high net income for the period. Net income for current quarter was almost $1 billion which was 44% more in value from the same quarter last year.

Due to higher Net income, Earnings per share for 4QFY13 were $1.57 which were 46.7% more in value from the year ago quarter. Net cash flow from operations were $2.5 billion in 4QFY13 which were up by 30% from the year ago quarter.

Net free cash flows (Net income minus capex) in 4QFY13 also appreciated by 202% in value from the year ago quarter. However their Capex in the same period declined by 17%.

CAT stocks have increased by 13.24% in value since the start of 2014 and analysts expect it to reach a consensus estimate of $98 in the coming 12 months and give the stock a hold rating.

During the recent Russia-Ukraine conflict, there were a lot of political tensions in the region. This can be a big worrying sign for CAT if Russia decides to retaliate against US sanctions. CAT has invested over $1 billion in the region since year 2000, and if Russia retaliates, it could stop trade between the two countries which is worth more than $38.2 billion. Sectors like Mining, manufacturing and banking will be largely affected from this event.

Furthermore, CAT lost the contract with Siemens (SI) and Cummins (SMI) that would have earned CAT $226 million. It also lost the contract in Illinois where they were required to manufacture locomotives for high speed trains.

Considering all these factors, outlook for CAT seems bearish. CAT stock quote as on 18th April 2014 was $102.83 down 0.10% from previous day’s closing price of $102.93. CAT stock graph has shown an upward trend this year since it has increased 13% in value year to date. But moving forward, CAT growth prospects are not as expected due to which their Revenues will remain flat as for the next year. Their stock price is expected to shed value for the same reason. CAT’s beta is 1.81 which is relatively high and shows that it is an aggressive stock and is much exposed to external and macroeconomic factors.

CAT is trading at a premium of 15% from the broader market but given its growth prospects and factors explained above, it is an overvalued stock and investors should take a short position given the risk associated with it.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s