We shorted Caterpillar (CAT) last week and have been adding to the name.
CAT reported Wednesday morning - the company missed sales/profits expectations and lowered guidance.
Here are the highlights:- Sales and revenue down 6%, profit per share down 8%
- Returned about $1.8 billion in share repurchases and dividends
- Full-year profit per share outlook range lowered to $10.90 to $11.40
Here is what I wrote, "CAT Is Still a DOG" five days ago:
I am adding CAT to my Best Ideas List (short)
I have done well with Caterpillar on the short side over the years.
I suspect we are approaching another short opportunity. (I took a trading short rental three days ago.)
Here are some of my reasons why I aggressively shorted CAT this week:
The rate of growth in all of the company's end markets are peaking.
The Construction division will suffer from a peak in activity (and pricing), the end of the replacement cycle and developing excess inventory issues (which will likely lead to destocking in 2020). With degradation in oil and gas capital spending plans, Energy and Transportation will also be weak next year.
The Construction, Energy and Transportation divisions will likely be turning negative next year while the Resources division outlook is deteriorating (as mining plans moderate and recent commodity price declines take hold).
In 2020 the earnings drag from the construction division will materially widen from this year (to -$0.90/share from "only" -$0.25/share). The energy and transportation division's drag will be more or less the same in 2019 and 2020, while the resources division's positive contribution will halve (to +$0.25/share from +$0.60/share).
With year over year drops in contributions to EPS from construction, energy and transportation offset by a positive contribution from Resources, share buybacks will be responsible for all of the year over year EPS (+3%) gain in 2019. That benefit (of $0.55/share in 2019) will moderate a bit next year.
As opposed to the consensus (and despite continued share buybacks), I expect EPS in 2020 (under $11/share) to be lower than 2019 ($11.70/share).
CAT earned $11.22/share last year. The stagnation of earnings from 2018 through 2020 means that the company (unimpressively) will have made no EPS progress since 2018 - despite an aggressive share buyback program.
Based on my forecast for subpar global economic growth and continued trade tensions with China I expect weakening results to continue in 2021.
This morning Morgan Stanley downgraded Caterpillar:
"The end market backdrop for CAT'S construction end market has deteriorated rapidly in recent months as evidenced by the decline in our CONI index. Our recent AlphaWise US Construction Dealer survey also raised fresh concerns about a dealer inventory de-stock in '20 as well as pricing concerns. Since we last adjusted numbers in our 3Q preview, our Oil Services team (led by Connor Lynagh) also took down its O&G capex estimates for 2020 and now expects NA upstream capex to be down -6%/-7%. Cumulatively, we have reduced our FY20/FY21 estimates by ~5-6% this month."
(This commentary originally appeared on Real Money Pro on October 23. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)