Today we have a speculative idea: take shares of caterpillar equipment manufacturer (NYSE: CAT), to cash in on potential growth in U.S. oil and gas production.
Growth potential and validity: 17,5% behind 15 months excluding dividends; 30,5% behind 2 of the year; 7% per annum, taking into account dividends during 9 years.
Why stocks can go up: because you can hope for an increase in activity among the company's customers.
How do we act: we take shares now by 186,51 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
We have already published a successful CAT investment idea, which has all the details about the business structure. Also recently published an up-to-date analysis of the latest report of the company. So we won't repeat ourselves here., but we will point out the main theses, important for understanding today's idea:
- The company produces complex heavy equipment such as excavators and gas turbines..
- Most of the company's revenue comes from the mining sector. The exact share of the oil and gas industry in the company's sales is unknown., but it fluctuates between 40-50% of revenue.
- The second most important segment for the company is construction and, for the most part, infrastructure work., about 40% from proceeds.
- The company is an exporter. According to the 2021 report, the United States accounts for only 37,8% her proceeds, rest 62,2% revenue is different, unnamed countries.
Arguments in favor of the company
Fell down. Stocks have dropped a lot in the past year.: from 244 to 186,51 $. This gives us the opportunity to hope for a rebound.
Oil must flow. Known events led to higher oil prices 100 $ per barrel - for the first time in a very long time. Also, the growth of optimism in the mining sector is supported by high demand for fuel within the United States.. This in itself creates a positive background for investments in oil and gas production by large companies..
There is "Big Oil" on the market - the largest oil and gas companies in the world such as Shell and Exxon. There are also independent small companies, who sell oil and gas for less than $5 million a year.
Both of them refrained from major investments in new projects even after, how oil prices have gone far from the negative values of March 2020. Probably, new geopolitical circumstances do not contribute to a decrease in the marginality of oil and gas projects. And what's more, may well support its growth.
Until recently, an energy crisis raged in Europe with dire consequences for consumers - and it is still not over. Russia is a key supplier of energy resources to the EU, and at the same time, the economy of the Russian Federation itself rests to a large extent on oil and gas exports. In order to replace the Russian Federation as an exporter of oil and gas to Europe, at least partially, Americans need to sharply increase investment in production and exploration.
However, against the backdrop of rising oil prices, we can expect, that the growth of investment in oil production will now begin around the world - that, given the export nature of CAT's business, in itself would be a plus.. But still I think, that the presence of a pronounced political motivation will lead the United States to increase investment in oil and gas production. Considering, how important the oil and gas sector is for CAT, this can be considered a plus for the company.
Something there about infrastructure. In the indefinite future, the United States can expect a wave of investment in infrastructure - and even without Biden. As I said in the idea by Emcor, no matter, who occupies the Oval Office in the White House, America's need for massive infrastructure investment just to maintain the current level of economic activity is enormous.
Suffice it to say, that during Biden's recent visit to Pittsburgh, an important transport artery collapsed - a 137-meter bridge. Experts have assessed his condition as bad since 2017., and now only in this state there are about 10% of their total. Total 36% bridges in the US today require extensive repairs or complete reconstruction. And that's just the bridges. And there are other roads, Airports, Railway tracks.
All in all, every year the need for investment in infrastructure is growing: Biden talks about investments in the region of $500 billion, and we need investments in the region of 4 trillion. Over time, private capital will come into this area, and therefore in the coming years we should expect an increase in investment in this area. And it will benefit the CAT. Let the company feel the effect of this not now. And not right away: it's about amounts, smeared over a large number of years.
Wrecked. The company pays 4,44 $ dividend per share per year, what gives 2,37% per annum. It's not very much, but, given the rather positive developments in the main markets of the company, allows us to hope for an increase in payments.
What is especially important: the company did not cancel payments even in the crisis year of 2020, when her income dropped, while the oil and gas industry was in a deep recession. So Caterpillar shares may well be taken by institutional investors with an eye to increasing payments..
Theory theory. The company is already very large: capitalization of about 100 billion dollars, annual revenue above 50 billion. Considering this, quite possible, that in a couple of years its management may think about spinning off part of its divisions into separate issuers. This can benefit shareholders.: quotes of small companies can grow better, than shares of "single" CAT.
CAT shares have been treading water for the last year, and, in theory, this could contribute to the emergence of an activist investor, which will require similar actions from CAT management. But that's not very likely right now.: investors in the coming year will expect the growth of the company's financial performance and dividends due to the circumstances described above.
So now I don’t see any reasons for scandals - although I could be wrong. Rather, over the years, CAT itself will attend to the issue of spinning off part of the divisions into separate issuers due to pressure from the ESG lobby.
What can get in the way
ESG threat. The spread of green investment can seriously hit both businesses, as well as company quotes. Its clients may not be given loans for new projects., and they will reduce consumption of CAT goods and services, and CAT itself can be shorted. She, probably, will try to “keep up” with the progressive agenda in the future and will take some action, to be considered "greener", than there is.
Probably, she will not get off with a simple performance and she will have to separate the most “dirty” businesses into individual issuers. Good, if she manages to do it on favorable terms for herself. But much more likely, what happens like BASF with Wintershall - in a hurry and with minimal profit.
However, may be, CAT quotes due to a hypothetical environmental turn will fly into the stratosphere, even if financial indicators fall sharply: ESG lobby loves companies, who "took the path of correction and, maybe, cooperation with administration.
But now CAT's ESG rating in Sustainalytics is not the best, and this can negatively affect both her finances, as well as for quotes.
Accounting. CAT has over 66 billion debts, of which 29.847 billion must be repaid during the year. On the accounts of CAT 9.254 billion, probably, companies will have to borrow even more. In anticipation of a rate hike, this is not very good and will scare off investors. Well, there is always a risk of cutting payments due to such debts..
Oil is a graceless business. In the long term, the company's dependence on demand from the oil and gas sector is, undoubtedly, problem, and not only because of ESG. Boom in production is constantly replaced by an oversupply and a fall in investment. But the ESG threat makes the situation in the sector even more unstable.: Now it's not just supply and demand that matters, but also the ideology.
Delayed growth. As long as the oil and gas sector ramps up investment, CAT can shift the inevitable growth in raw material costs for a machine-building enterprise in the current conditions, logistics and labor for their customers. When will this growth stop?, CAT margins will start to suffer.
What's the bottom line?
CAT is relatively inexpensive: P / S she has a little less 2, a P / E — 15,8. So, taking into account all the positive aspects, you can take the shares now at 186,51 $. Then there are three options:
- wait for growth until 220 $. Think, we will reach this level in the next 15 Months;
- keep up 244 $. Here you should prepare to hold shares for the next two years.;
- keep shares next 9 years, while the company is increasing dividends and, which is very likely, divides its business into different issuers.