Pat McKeough responds to many requests for specific advice on buying stocks and other questions on investment strategy and the economy from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle. This week, an Inner Circle member asked about the world’s biggest heavy equipment maker, Caterpillar. With slower economic growth in its main markets, especially China, the company has seen its revenues slip. Pat examines Caterpillar’s ambitious acquisition policy and looks at the company’s financial outlook in the face of slowing demand in a still-sluggish global economy. Q: Dear Pat: Is it a good time to buy Caterpillar? Thanks. A: Caterpillar Inc. (symbol CAT on New York; www.caterpillar.com) is the world’s largest maker of earth-moving equipment, including tractors, scrapers, graders, compactors, loaders and pipe layers. It also makes lift trucks and diesel and turbine engines. The company gets 63% of its sales from outside the U.S. Its clients are mainly in the mining, logging, farming, construction and oil and gas industries. Caterpillar sells its machines through a worldwide dealer network. It also provides dealers and customers with equipment financing and insurance. The company has a long history of expanding through acquisitions. In July 2011, it acquired Milwaukee-based Bucyrus International, which makes gear that is used for mining and in the development of the oil sands. This purchase made Caterpillar the world’s largest mining machinery supplier. It is now rebranding all of Bucyrus’s equipment under the Caterpillar name. The company paid $7.4 billion in cash for Bucyrus. If you include $1.6 billion of Bucyrus’s debt, the total purchase price was $9.0 billion. In November 2011, Caterpillar completed its $774-million purchase of MWM GmbH, a German company that makes engines that run on natural gas and other alternative fuels. In May 2012, Caterpillar bought ERA Mining Machinery Ltd., a Chinese firm that makes and repairs underground coal mining equipment, for about $700 million. However, accounting irregularities subsequently forced the company to write down the goodwill associated with this purchase by $580 million. Later, Caterpillar reached a deal with ERA’s former directors and other related parties that lowered the amount it still owes them by $135 million, to $29.5 million. [ofie_ad]
Caterpillar resumes share buyback program and raises quarterly dividend
In the three months ended March 31, 2013, Caterpillar’s sales fell 17.3%, to $13.2 billion from $16.0 billion a year earlier. Earnings dropped 44.5%, to $880 million, or $1.31 a share, from $1.6 billion, or $2.37. The latest earnings also fell short of the consensus estimate of $1.40 a share. These declines are mainly due to slowing economic growth in China, which has hurt the prices of various commodities, including copper, coal, gold and iron ore. That’s prompting mining companies to cut spending on new equipment. Mining firms account for a third of Caterpillar’s sales and half of its profits. China supplies 70% of its overseas sales. Demand for coal mining equipment in the U.S. has also weakened as more electrical power plants switch to cheaper natural gas. Caterpillar’s balance sheet remains sound. Its long-term debt of $27.3 billion is a high, but still manageable, 47% of its market cap. It also holds cash of $6.0 billion, or $9.10 a share. The company is using its cash to resume its share buyback plan, which it suspended in 2008. It repurchased $1.0 billion of its stock in June 2013 and still has $3.7 billion remaining under this authorization. There is no time limit for the remaining purchases. In addition, Caterpillar recently raised its quarterly dividend by 15.4%, to $0.60 a share from $0.52. The new annual rate of $2.40 yields 2.7%. In the Inner Circle Q&A, Pat looks at the financial outlook for Caterpillar in light of slower economic growth in China and the U.S. He also examines Caterpillar’s long-term outlook and whether projects in developing countries can offset slower growth in the company’s traditional markets. He concludes with his clear buy-hold-sell advice on the stock. (Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.) COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members When a company like Caterpillar is dominant in its industry, do you think it is worth holding the shares over time and even adding to them when the price is down? Or do you think it is best to buy the stock only when the economy is on the rise and demand for its products is up? Let us know what you think.
