Transcript Sell CAT
Caterpillar A conditional sell pitch by Ryan Dombrowski Business Description ● From Hoovers: Whether digging, loading, paving, or moving, Caterpillar does it all. The company is the world's #1 manufacturer of construction and mining equipment, It also manufactures diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. Things to Consider ● CAT’s business is highly levered to the global economy (beta = approximately 1.8) ● Core Operations are levered to emerging markets, especially China (approx 70% of revenue is from outside the US) ● Any weakness in the mining sector should be viewed as weakness for CAT (CAT supplies the machinery) Copper/CAT Correlation China/CAT Correlation Technicals Fed Tapering/EM ● Negative impact on EM if/when Fed tapers http://www.bloomberg.com/video/imf-emerging-markets-hithard-by-taper-talks-Ddwm9amtQMaX1TyeOeWLgw.html SWOT S: 7/29/13- $1 billion accelerated stock buyback W: 20% declines forecast in Mining CapEx in 2014 O: world economic growth continues -> commodity production increase -> more CAT equipment needed T: slowdown in growth rate of China -> less need for CAT’s machines With that in mind... From JPMorgan: “Our Overweight rating on CAT is predicated on the company’s long-term growth prospects and exposure to global GDP, which we believe will be positive over the long run, as emerging markets are likely to continue to outgrow developed economies for the foreseeable future, driving incremental demand for hard commodities. In the near term, the macro-environment remains sluggish, with upside potential going forward from a slow improvement in Europe; the company still faces excess supply across several end markets, but we believe that most of the downside risk has been priced into the stock at this point, and that risk/reward favors owning the stock.” JPMorgan has an Overweight rating w/ a$96 price target. Not so fast... From JPMorgan: “If the lack of macro visibility persists, multiples may remain compressed, which could result in our price target being too high. A slowdown in spending by mining customers following 7 years of investment well above the prior cycle is weighing on the stock, and may continue to do so into 2014. Increasing interest rates could also slow the pace of capital expenditures, and therefore revenues could disappoint into 2014.” Conclusion ● I DO believe that JPMorgan’s price target is too high and I am proposing that upon your approval, IPO put in a sell order for CAT. Any Questions?