Senior Research Analyst Joel Tiss of BMO Capital Markets says his research on Caterpillar Inc. (NYSE:CAT) led him to downgrade the stock, even as the company claims it’s maintaining its full-year guidance.
I had done some in-depth research including reading through the 10-K, and did a bunch of background work because they announced that they were going to miss their first-year quarter by quite a bit, but that they were maintaining their full-year guidance. As I was doing the research, I noticed that for the last three or four years, they had consistently come in below their revenue guidance, but managed to make their EPS guidance.
So I looked a little bit deeper into what was the driver of that, and I found a whole list of special factors that are largely unrepeatable. For example, they lowered incentive compensation for employees, had an FX gain, and they lowered their warranty expenses.
There is a whole list of similar special circumstances and things they did in my note on the subject, but the bottom line is a lot of those are one-time in nature that you can’t do again. Caterpillar, like a lot of my companies, is pushing the story that they are more resilient to this down cycle than their competitors, saying they have made changes and improvements, and that they are less cyclical and less vulnerable so they should get a higher valuation.
It is certainly true that the companies have done a ton of work to drive operating efficiencies, and they have improved the profitability and the metrics and other things. I’m not trying to take any of that away from them, but I think underneath it all, these are still very cyclical companies, and there is only so much you can do when you are not getting the orders.
So in the case of Caterpillar, my downgrade was a reflection of my research, which makes us question whether they will be able to meet that full-year guidance based on where they are now and what they reasonably will be able to do to get to those numbers.
