Wednesday, July 24, 2013

Commodities: Caterpillar At $84 May Only Be Worth $28 (CAT)

Ever hear of Caterpillar Finance?
In early pre-market trade the stock is down 1.70% at $84.05
From Bloomberg:
Caterpillar Cuts Forecast as Profit Misses Estimates on Mining
Caterpillar Inc. (CAT:US) cuts its earnings forecast and posted earnings that trailed analysts’ estimates for a third straight quarter as mining-equipment sales declined on slower commodity demand. 

The world’s largest manufacturer of mining and construction machinery saw second-quarter net income drop to $1.45 a share from $2.54 a year earlier, Peoria, Illinois-based Caterpillar said today in a statement. That missed the $1.68 average of 19 estimates compiled by Bloomberg. Sales declined to $14.6 billion from $17.4 billion, less than the $14.9 billion average of 16 estimates.

The company forecast 2013 earnings of about $6.50 a share on sales of $56 billion to $58 billion. In April, it predicted full-year profit of about $7 a share on revenue of $57 billion to $61 billion. Analysts projected profit of $6.81 a share on sales of $58.6 billion.

“Mining is a headwind,” Stephen Volkmann, a New York-based analyst for Jefferies & Co. who has a hold rating on the company, said in an interview last week.

Caterpillar has expanded in mining through acquisitions over the past two years, making resource industries the company’s largest unit by revenue. Now it’s battling for customers as commodity demand slows. Mining capital spending will drop 11 percent this year and 14 percent next year, based on estimates from the 40 largest global mining companies, according to Volkmann.
`Wrong Products'

The commodities supercycle, or longer-than-average period of rising prices, is coming to an end and Caterpillar “is tied to the wrong products at the wrong time in the cycle,” short seller Jim Chanos said July 17. Chanos, the founder and president of Kynikos Associates Ltd. and who predicted the collapse of Enron Corp. in 2001, said he’s shorting Caterpillar....MORE
And from theLongShort Trader:

CATastrophe: Why Caterpillar, Inc. is a Strong Sell
A few friends and I have been bearish Caterpillar, Inc. since at least Q1 of this year. The full report in the embedded document below includes information and opinions provided by said friends of LST. We believe:
  • Questionable revenue recognition practices between CAT & its foreign subsidiaries seem ripe for malfeasance.
  • 54% of CAT’s assets belong to Caterpillar Finance, yet management rarely mentions its existence. Shareholders seem unaware of its existence (just as many of GE’s shareholders were unaware of GE Capital before 2008)
  • CAT’s customers are slashing spending & are in cash conservation mode. Some are at risk of filing chapter 11. 70% of sales originate from outside the United States.  Take FCX for example which just announced it is reducing, deferring capital expenditures, and seeks asset sales.
  • CAT does not generate enough free cash flow to cover its dividend.
  • CAT completed $9 billion in failed (including one fraudulent), value-destroying acquisitions since 2010.
  • Channel checks from 4 sources show backlog worse than the lower end of expectations.
  • Compensation targets mis-aligned and far beneath management’s guidance and stated goals.
  • CAT shares are worth no more than $28.00/share (67.4% downside) & face further downside risk depending on how China & the commodity bust play out...

Last week
"Jim Chanos: Why I'm Short Caterpillar" (CAT)