Caterpillar’s CEO, Doug Oberhelman, is known to be extremely promotional. I always failed to understand how the market keeps on taking his word at face value given such a poor track record of forecasting and torturing the numbers. To get everybody up to speed, let’s see what has been been happening at Caterpillar since 2013:
Take a minute to read through the table (click on the picture to see it more clearly). One thing that catches the eye is the earnings beat in 2014, a year that started with an initial EPS outlook of $5.3 and ended with an EPS of $5.88. Since sales can be pushed and pulled easily–usually tempting the customer to do so by extending a discount–it will be more useful to look at a 3-year average. For 2013, I used the mid-point of the guidance, $8 per share. Take a look at that:
I have nothing against promotional management teams. Mike Fries, Liberty Global’s CEO is highly promotional, but, he promises and then over delivers. At Caterpillar the opposite is the norm: over promise, then promise a bit less over time and finally, under deliver, by almost 25%!
This pattern has been going on for over three years and as shown by the table above, 2016 seems to be no different.
JP Morgan’s equity research team has almost always been overly optimistic when it comes to Caterpillar as can be seen by the price targets they set:
They are still very optimistic as in their analysis they peg a PE multiple of 20 to Caterpillar and still, they arrive at a price target of $60. Caterpillar currently trades slightly above $74 and I’m really puzzled by this. And so should you be.
Here are some thoughts that disturb the optimistic PE ratio of 20 that JPM pegged to the stock:
- The end of the commodity super-cycle is not just a cyclical shift, it is here to stay
- There is no growth in sight for Caterpillar
- Mike DeWalt, VP of finance, on his last conference said that there’s no need to talk about Caterpillar’s huge financing operation so the sell side didn’t say a thing. I wonder how could it be that while Caterpillar end customers are suffering and some of them are going bust, this financing operation shouldn’t be discussed in more detail.
Raping the pension plan’s numbers to squeeze another $0.5 for the 2016-guided EPS is a new low for the company. Such a company doesn’t deserve a PE of 20. I’m sure most of you can think of better-managed companies, with secular tailwinds, nice growth prospects and decent management teams that get lower multiples.
Charline Munger once said “never underestimate a person who overestimates himself.” I feel like that truly applies to Caterpillar’s management team, who by exuding confidence and misleading investors and analysts manages to keep the price of the shares above even the most optimistic sell side analysts’ target price.
However, with earnings of $3 per share (if we take the previous guidance at face value), a dividend of $3.08 per share and such a poor forecasting track record, it seems to me that a dividend cut is in the cards.