Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is Caterpillar Making Money?

Heavy-equipment and diesel-engine maker Caterpillar Inc. (NYSE: CAT) could offer America a recession warning.

In particular, Caterpillar’s revenue growth rate fell by -5.57% last quarter, Stockrow estimates. In the previous quarter, Caterpillar; or Cat, reported a revenue growth rate of 3%.

Furthermore, Caterpillar’s quarterly revenues fell from $14.432 billion on 30 June 2019 to $12.758 billion on 30 September 2019. Plus, Caterpillar’s quarterly gross profit fell from $4.299 billion on 30 June 2019 to $4 billion three months later.

Is the Trade War Hurting Caterpillar?

Hence, Caterpillar is doing less business and reeling from the economic turmoil President Donald J. Trump (R-New York) unleashed with his trade war on China.

For instance, the number of farm bankruptcies rose by 24% to 580 between January and September 2019, the American Farm Bureau Federation claims. Markets Insider estimates farm bankruptcies are the highest level since 2011.  

The Federation and Markets Insider blame steep tariffs the Chinese government placed on US agricultural products for the increase in bankruptcies. The People’s Republic implemented the tariffs in retaliation for Trump’s tariffs.

“Farmers and ranchers struggle with a prolonged downturn in the farm economy that’s been made worse by unfair retaliatory tariffs on US agriculture as well as two consecutive years of adverse planting, growing and harvesting conditions,” John Newton claims. Newton is the Federation’s chief economist.

I think the farm recession hurts Caterpillar, because farmers are big buyers of heavy equipment and diesel engines. In addition, the People’s Republic is buying Caterpillar heavy equipment for projects; including its New Silk Road scheme, Reuters claims. Plus, Caterpillar is investing heavily in China by building 25 factories in the world’s largest construction and mining equipment market.

To elaborate, the $900 billion New Silk Road is a series of road, rail, and sea links between Europe and China. Interestingly, the New Silk Road includes rail lines and highways that follow the historic Silk Road trade route between Europe and China.

How Much Money is Caterpillar Making?

Caterpillar (NYSE: CAT) is making less money. Notably, Cat’s quarterly operating income fell from $2.213 billion on 30 June 2019 to $2.02 billion on 30 September 2019.

Additionally, Caterpillar’s quarterly net income fell from $1.62 billion on 30 June 2019 to $1.494 billion on September 30, 2019. Thus, Caterpillar could have less money because of the Trade War.

Dramatically, Caterpillar is generating cash because of the trade war. For example, Caterpillar’s quarterly operating income fell from $2.588 billion on 30 June 2019 to $769 million on September 2019.

Furthermore, Cat’s quarterly free cash flow fell from $2.123 billion on 30 June 2019 to $528 million on 30 September 2019. Plus, Caterpillar’s financing cash flow grew to $20 million on 30 September 2019 from -$1.376 billion on 30 June 2019.

In contrast, Cat’s cash and equivalents grew from $7.429 billion on 30 June 2019 to $7.906 billion on 30 September 2019. However, Caterpillar’s total assets fell from $79.187 billion in June 2019 to $77.993 billion in September 2019.

Caterpillar Inc. Announces Layoffs

Predictably, Caterpillar plans to lay 120 temporary workers at its hydraulic excavator factory in Victoria, Texas, off, The Victoria Advocate reports. The Victoria factory employs around 600 people, Freight Waves notes.

My guess is that this could be the first of many layoffs at Caterpillar plants in the United States. To explain, I suspect Cat’s management believes an economic downturn is coming America. Hence, the company is preparing by cutting its operations and expenses.

Thus, we could see major drops in Caterpillar stock. In contrast, Cat stock rose from a low of $137.8 on Halloween Day 2019 to $145.40 on 6 November 2019. Thus, Mr. Market has more faith in the American economy than Cat’s management.

Only time will tell if Caterpillar’s executives or stock investors are smarter. However, I think executives who have knowledge of day to sales and business could know more about the economy than stock geeks.

Is Caterpillar Value Investment?

I think Caterpillar is an overpriced value investment because it is a good company facing a serious drop in revenues. Hence, Caterpillar (NYSE: CAT) could soon face a stock drop but it makes money.

Cat has a lot of value because it has some great technology and a large presence in China. Therefore, CAT could make a lot of money if China’s rise to dominant economic power continues.

However, Caterpillar could face huge losses in the US if the American economy contracts. I think a major decline in American economic activity is imminent because of the falling income of average Americans.

For, Career Builder estimates 78% of American workers were living paycheck-to-paycheck in 2017. Frighteningly, that percentage was up from 75% in 2016. Thus, ordinary Americans have less money which I think will lead to less economic activity.

There will be a Massive Drop in Economic Activity in America

Plus, trends like the retirement of Baby Boomers, and the resulting retirement crisis will make things worse. To explain, I believe millions of Americans will retire with nothing but Social Security over the next decades.

For instance, the average Social Security Old-Age and Survivors Insurance payment in September 2019 was $1,402 a month in September 2019, the Social Security Administration estimates. That translates into a yearly income of $16,824.

Meanwhile, the Population Research Bureau estimates there are 76.4 million Baby Boomers; people born between 1946 and 1964 in America. Consequently, 71.4 million Americans will be age 65 or older in 2029.

Thus, America faces a huge drop in individual incomes and economic activity over the next decade without massive changes to federal policy. As a result, companies like Caterpillar are expanding overseas; cutting US operations, and accumulating larger cash reserves.

Is Caterpillar a Good Dividend investment?

I think Caterpillar (NYSE: CAT) is currently a great dividend stock. For instance, Caterpillar paid a $1.03 dividend on 18 October 2019.

Impressively, Caterpillar’s dividend grew by 17₵ in 2019. In detail, Cat paid an 86₵ dividend on 18 April 2019 and a $1.03 dividend on July 19, 2019.

Overall, Caterpillar shareholders received a dividend yield of 2.81%, an annualized payout of $4.12, and a payout ratio of 37.63% on 6 November 2019, estimates. Plus, CAT has been delivering dividend growth for nine years.

In conclusion, I think Caterpillar (NYSE: CAT) is a good stock that Mr. Market overprices. Instead of buying CAT investors need to watch CAT because its share price and financial numbers can show us where the US economy could go.