The definition of a cyclical company might as well be one that sells construction equipment, mining equipment and gas turbines. Trying to time when to invest in these heavy cyclical companies is almost more of an art than a science.
The particular global leader in this field is Caterpillar Inc. (NYSE: CAT), with operations in over 50 countries around the world. The name was derived within 1904 when Benjamin Holt replaced the rear wheels from a Holt steam tractor with a pair of tracks in order to help farmers deal with soft soil. During a field test in 1905, the company photographer exclaimed that the machine crawled like the big caterpillar.
Caterpillar will be expected to generate over $58 billion within revenues in 2022 plus currently has a market capitalization of approximately $119 billion. It’s still going strong for now, but as a recession begins to unfold and construction begins to fall off, Caterpillar shareholders could be in for trouble because their shares are trading near all-time highs at the moment.
About the particular company
Caterpillar operates through four segments: Construction, Resource, Energy and Transportation and Financial Products. The particular Construction segment makes a wide variety of construction equipment, such as asphalt pavers, excavators, cold planers, etc. The Resource segment provides electric rope and hydraulic shovels, draglines, rotary drills, hard rock vehicles, wheel dozers plus other machines used primarily for exploration and heavy construction. The Energy and Transport segment manufacturers engines and integrated systems for power generation purposes in a wide selection of industries plus applications. Lastly, the companys Financial Products segment offers financial support for customers in order to buy its products through operating and finance leases, installment sale contracts, working capital loans and wholesale financing, as well as insurance and risk management products.
Recent earnings
The company recently reported third quarter results with regard to 2022, and it appears the company is firing on all cylinders. The Building segment saw sales increase 19% plus operating profits rise 40%, the Source segment boosted revenues by 30% along with segment earnings increasing 81% and the Power and Transporation segment increased revenue simply by 22% and segment working profits by 32%. The familiar theme in these solid increases has been favorable price realization, meaning the organization is raising prices on all their customers, which is also a familiar theme within most industries today.
The particular operating margin was 16. 2% for the quarter compared with 13. 4% for the prior-year period. Adjusted profit per share was $3. 95 compared with third-quarter 2021 adjusted profit per share associated with $2. 66.
Chairman plus CEO Jim Umpleby stated, Our team remains focused on serving our customers as we continued to see healthy demand across most of our end markets during the third quarter.
The organization has a complicated balance sheet because it finances a large portion of its equipment sales. The business offers $22. 7 billion in financing liabilities, which makes it the fairly decent-sized bank. That line item is offset by funding receivables associated with $20. seven billion. Traditional debt stands at $13. 7 billion dollars against cash of $6. 3 billion.
During good times, the organization generates strong free money flows, and for the first nine months of 2022, operating cash flow was $5. 0 billion plus capital expenditures were $868 million. The company repurchased shares during this period totaling $3. 3 billion dollars. Yet, investors should question this buyback strategy as the stock has been trading near all-time highs throughout much of the year.
Valuation
The particular 30-year income history of Caterpillar is choppy as it often struggles through recessions. In 2009, revenues dropped 37% and revenue per share dropped 75% from the particular prior 12 months.
Nonetheless, consensus earnings for each share estimates are $13. 89 regarding this yr and $15. 00 intended for next season, which seems odd within my view with high chances of an economic downturn occurring in 2023. That will puts the company investing at sixteen times this particular year’s forward earnings and 15 times 2023 profits.
The GuruFocus discounted cash flow (DCF) calculator gives us a value estimate associated with $175, or 31% below today’s prices, using next year’s cash flow per discuss estimate of $15. 00 and a long-term global GDP growth rate associated with 4. 0% to sub in for long-term company development, as Caterpillar is too cyclical to value it accurately in the near-term. During major recessions, companies in this industry can suffer major salary and share cost declines.
The company pays an annualized dividend of $4. 80, which equates to a 2 . 08% dividend yield . The particular payout ratio is beneath 50% based on current earnings per share estimates for this year plus next.
Guru trades
Gurus who have purchased Caterpillar stock recently include Murray Stahl ( Trades , Portfolio ) and Mairs and Power ( Trades , Portfolio). Experts who have reduced or sold out of their positions include Mario Gabelli (Trades, Portfolio) and Diamond Hill Capital (Trades, Portfolio).
Summary
Caterpillar is highly levered in order to both macroeconomic issues and commodity costs such as steel and oil. With an inverted yield curve and mass layoffs occurring at main corporations, the particular odds of the recession next year are fairly high. With its stock trading close to all-time highs, it is likely not a good time invest in Caterpillar share in my view. Typically the best time to invest in cyclical stocks like this has been in the middle of an recession after income and income have materially declined, leading to a plummetting share price, and were not at that will point yet.
This article first appeared upon GuruFocus .