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CAT: Backlog Decline Implies Weak Orders

  • Despite the move up in CAT today, which we view as short covering driven, weak backlog trends support recent underperformance in the shares.
  • Backlogs declined for first time since 3Q 2009, as the company drew down backlogs in todays “beat.” 
  • As shown below, months of backlog are highly correlated with CAT’s relative performance.
  • Implied orders (estimated as change in backlogs plus revenue) declined 3.0% y-o-y after posting 12.2% growth y-o-y in 1Q2012.  That is a significant deceleration.
  • Something has to give: orders will need to rebound, production will have to be cut, or backlogs will be drawn down.  The current macro data does not suggest a near-term order rebound to us.
  • CAT has been one of the primary beneficiaries of what we view as unsustainably high levels of resource capital investment.  Slowing activity in China is a risk to mining capital spending.
  • Though CAT has an excellent competitive position and a strong franchise, we believe that the shares are overvalued from a cyclically adjusted perspective. 
  • While the months of backlog is still relatively high, historically that has presented an exit opportunity. 

CAT - Backlog Declines & Backlogs Drives the Stock - cat vs months backlog

Orders vs. Revenue:  Implied orders rates now trail revenue, as indicated by backlog declines.

CAT - Backlog Declines & Backlogs Drives the Stock - change in backlogs

BA is not CAT:  For those noting a slight decline in years backlog at Boeing Commercial Aerospace this quarter, that metric is negatively correlated with relative performance.  A change in a 5 month backlog has more relevance than a change in a 7 year backlog.  Though we are well into the commercial aerospace cycle, we think Boeing still has room to run.

CAT - Backlog Declines & Backlogs Drives the Stock - ba rel vs backlogs