We’ve been negative on Caterpillar (CAT) since mid-2012 when we launched on CAT. Our Industrials Sector Head Jay Van Sciver has been out in front of the name and followed up the company’s Q2 results with a note titled, “CAT: It Gets Worse From Here.” That pretty much says it all.
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Over the weekend, Barron’s ran an article suggesting hope for the stock. We disagree. There was a lack of proper historical context (e.g. resources-related capital investment cycles are closer to thirty years, not three) as well as complete disregard for what we see as one of the key risks – Cat Financial, where margins are in decline and loan loss reserves on the rise, as well as building used equipment in several key product categories.
On a related note, one of the best visuals Van Sciver highlighted in his June 17th Black Book is the list of Cat Financials’ major mining accounts – it’s not exactly a picture of health.
Bottom line: We see another +25% relative downside in the name and suggest taking advantage of any bounce (like today’s Barron’s “pop”) as an opportunity to move out of the name.
**If you would like to view our research on CAT (including Jay Van Sciver’s recent Black Book) or are interested in learning more about Hedgeye’s institutional research, please send an email to firstname.lastname@example.org.