Tuesday, January 27, 2015

Stock Purchase: CAT

Today on 01/27/2015, I purchased 30 shares of Caterpillar Inc.(NYSE:CAT) at $79.85 per share.

CAT reported its Q4 earnings result today. Share price plunged 7% due to lower than expected earnings result.  2014 Q4 sales and revenues is $14.244 billion, slightly down from $14.402 billion in the fourth quarter of 2013.  Profit per share in the fourth quarter of 2014 was $1.23, compared with profit per share of $1.54 in the fourth quarter of 2013. The major reasons contributed to the disappointing result is the relatively slow growth in the world economy and continued weakness in commodity prices, particularly oil, copper, coal and iron ore.


Caterpillar reduced its sales outlook for 2015 as current oil prices remain a “significant headwind.” In 2015, Caterpillar expects sales to decrease 10 percent from $55 billion 2014 to $50 billion.  The recent dramatic decline in the price of oil is the most significant reason for the year-over-year decline in Caterpillar’s sales volume and revenue outlook for 2015. Prices for mined commodities such as copper, coal and iron ore have continued to decline, and order rates for mining equipment have remained at low levels. Lower expectation for sales in China and strong U.S. dollar also contribute to negatively impact 2015 sales.

CAT is the world's largest producer of earthmoving equipment, and a big maker of electric power generators and engines used in petroleum markets, and mining equipment. As the world’s largest manufacturer of construction and mining equipment, When Caterpillar Inc. isn’t doing well, the global economy isn’t doing well.  Considering the highly cyclical nature of Caterpillar's industry, stock prices fluctuate with time.  However, I have confidence that $80 or below is a entry price.

In this article, I analyzed that CAT meets my 10 out of 11 purchase criteria.


Criteria
CAT indicators
CAT check result
Note
Dividend CCC list
Dividend contender
V
Contender with 21 years of dividend payment.
S&P Capital IQ
4-stars
V
Buy/4-stars
Morning Star
3-stars
V
3-stars
Dividend yield
3.30%
V
Greater than 3%
Payout ratio
45.31%
V
Less than 60%
10-year dividend growth rate
12.79%
V
Greater than 5%
Chowder number
12.19%
V
Greater than 12%
10-year EPS growth rate
$5.14
V
Stable and uptrend
Free cash flow
Positive
V
Greater than dividend payout on average
Price discount
20.5%
V
Fair price $101.19, market price $84.
Debt to equity
1.50
X
Much higher than 50% criteria

This article excellently summarized the dividend history.  Caterpillar has increased annual dividends in the last 20 years in a row since 1994. Caterpillar has traditionally announced dividend increases in mid-June with the stock going ex-dividend in mid-July. It is expected that Caterpillar will announce their next dividend increase in June 2015.




In its Q414 earnings release, CEO Doug Oberhelman re-emphasized their plan on stock re-purchase.  Citing from the CEO, "In the first quarter of 2014, the Board of Directors approved a $10 billion authorization which expires in December 2018. At the end of 2014, we had $7.5 billion remaining in the authorization. Our strong balance sheet and cash position provide us with the ability to repurchase additional stock. We expect our repurchase activity to be consistent with our stated cash deployment priorities and are considering
additional repurchases in 2015.

All in all, Capterpillar is a strong company with solid fundamentals.  I am happy to get in at around $80 and collect dividends at a decent yield rate 3.5%, while patiently waiting for the stock price to bounce back.

Disclosure: Long CAT.  I currently have sold CAT Jan 2016 85 Put.



 

1 comment:

  1. Like the strategy to improve your entry price with a written put! Will you write covered calls if you get assigned or is this a "hold forever" purchase?

    ReplyDelete