$CAT Stock Analysis
With stocks being beaten up over the Chinese tariff war news, Caterpillar has become an interesting stock to watch. Since its roots are big into the worldwide manufacturing and construction industry, any slowdowns in those sectors could mean slowdowns for CAT as a whole.
Here is the current chart for CAT:
The slowdown trend has been driving its stock to trading off of 52 week lows, but has also presented an opportunity to capture this stock at a lower price, which has pushed the dividend yield up past the 3% mark.
While the CAT stock is already a member of the MoneyByRamey.com dividend portfolio, I thought it would be interesting to put it through our dividend analysis process.
We’ll begin with a look at the forward dividend calculator.
#1 – Forward Dividend Income
As the first step in our dividend analysis process, we always look to calculate the forward dividend income. We do this by entering the data into the forward dividend calculator. Here are the results for CAT:
|Forward Dividend Calculator|
|Annual Dividend Payout||$4.12|
As we can see by the calculator’s results, this is beginning to look like an interesting opportunity to own a good company at an affordable entry point. The fact that the dividend yield is above 3% when it has been trending in the 1-2% range the past few years is a positive sign for a dividend value investor.
The only drawback that I can see is that at or near the stock price level of $119, I would only accumulate a little over a share per year with this stock on DRIP.
Ideally the goal is to have that accumulation be higher, but the caveat is that typically the higher the share accumulation, the higher the overall risk on the stock. As investors, we need to balance this risk/reward scenario carefully.
Being that the FDI is intriguing, it is enough for me to take the CAT stock into the next round of our review: the Quickview.
#2 – The Quickview: CAT Stock Analysis
Here we will complete the ‘eyeball’ test, and quickly compute these factors in our head or answers these questions as best as we can.
For those of you that are detail-oriented, you can always complete the Spread before answering the questions in the Quickview phase, however, I find that stocks do not always pass the questioned answered below, thus making the entering of the data into the Spread irrelevant. Therefore I choose the quick analysis before doing additional work.
Question #1: Is a moat present?
Yes. Considering that CAT produces many large industrial construction vehicles and equipment, its business model can be very difficult to replicate.
Not only would a competing company need to have significant working capital to begin operations, it would also need the engineering expertise to build such large scale machinery.
In addition to selling machinery, it also has the distribution network to sell its products throughout the world.
Question #2: Is Cash Flow From Operations (CFFO) positive?
Yes. For 6/30/2019, the cash flow was at $3.7B. This is great to see, but we want to ensure this isn’t a one-time, cyclical event. Thus, we’ll go over to MarketWatch to see five year annual statement data trends.
A quick look at the company’s five year cash flow statement shows that it has had $5.61B+ in positive cash flow. For the dividend investor, this is a good and needed sign, as we want to ensure that the companies we invest in continue to generate solid cash flows with which they can pay out dividends.
Question #4: Did CFFO cover dividend payments?
Yes. With CFFO at a solid $3.7B, dividend payments of $986M for 6/30/19 were adequately covered with the cash generated by operations.
This same trend holds true for the annual financials as well.
Question # 5: Was working capital positive the past three years?
Yes. For this ratio, we will view the balance sheet for the past three fiscal years, which shows current assets around $38B, which covered current liabilities of $28B nicely. It looks as though for the past 3-5 years, the working capital coverage is around $10B.
The one caveat to this ratio specific to Caterpillar is that much of the working capital is made up of inventories, which consists of large construction equipment for sale. Being that these products are not turned over as quickly as say, an iPhone, the positive working capital can be a deceiving number.
We will still answer ‘yes’, that working capital is positive, but realize that the company would be more susceptible to downturns in the overall market conditions due to having inventory that does not sell very quickly.
Question #6: Is the company in a growing industry
Yes. Overall, the company seems to be in a growth phase. While revenues did dip to $38.5B in 2016, it went back up to $54.7B in 2018.
With the current China/US trade war, this will be something to watch for. The company is especially susceptible to any recession that would negatively impact the construction industry.
Question #7: Is the debt/equity at, close to, or under 1x?
No. All of those big machines are not going to finance themselves. With $64B of total debt and $14B of equity, the debt/equity ratio is a bit higher than I’d like to see at 4.6x. This is the biggest knock that I have seen against many modern company – high levels of debt.
Since quantitative easing has made it very cheap for companies to borrow money, I do not blame them for taking advantage of the low-interest rate environment to borrow more debt to increase their return on investment.
However, one thing for the astute investor to watch for is the effect this debt has on overall operations. From what I have seen, many companies are using increasing debt positions to hide operational problems within their companies.
Now that CAT has passed the Quickview, we take the stock into the next step in the process, The Spread.
#3 – The Spread
Now it is time for the CAT stock spread.
Here are four main sections that are calculated:
High-Level Summary Information
|Working Capital Ratio||1.43|
The High-Level Summary Section Highlights:
- Even though the stock’s price has been falling, the P/B is a bit higher at 4x. As a value investor, this tells me that we are buying in for 4x the equity of the business.
- Debt ratios are a bit higher than I’d like to see. Since the company makes large industrial equipment highly dependent on the construction sector, this will be something to analyze a bit deeper to see if it is a trend we are ok with seeing.
Balance Sheet #s
|Working Capital ratio||1.43|
The Balance Sheet Highlights:
- Current assets exceed current liabilities, which is excellent to see. It would be wise to complete a deep dive will need to ascertain what assets make up the current amounts. I would be concerned if equipment for sale was included in these numbers as the large industrial equipment would not be very liquid during a market downturn.
- Intangible assets at $7.9B stands out. I would dig into this a bit more during the deep dive process to figure out what this number consists of. It would be worth it to understand this a bit further.
Income Statement #s
|Depreciation & Amortization||1,288,000,000|
The Income Statement Highlights:
- Solid net income which covers interest expense at 17x. This tells me the company makes more than enough profit to cover its debt and that the interest rates on that debt should be relatively low.
Cash Flows #s
|Cash Flow Statement|
|Change in Cash||(421,000,000)|
The Cash Flow Highlights:
- At a 4x CFFO/Div coverage ratio, everything this looking solid with the CFFO statement. I do not have any concerns at this time about the company’s ability to generate solid cash from its operations.
The Spread Summary: CAT Stock
Overall CAT is a solid income and cash flow generator. It shows that even in a tough environment – the Chinese tariff war world – it can still general solid cash flow and income which cover both dividends and interest expense.
A concern is the company’s debt ratio. It is higher than I’d like to see. Some of this happens to do with the type of equipment the company manufactures; large industrial equipment which closely follows the construction industry.
Even though the stock currently trades in the three digit territory, the dividend yield is enticing at 3.61%. This is definitely a stock that I would consider investing in at this present time.
Would you currently invest into CAT stock at today’s prices and conditions? Why or why not? Comment below and get the conversation started!
Disclosure: Long $CAT
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