September 24, 2015

VALUATION WATCH: Overvalued stocks now make up 38.49% of our stocks assigned a valuation and 12.9% of those equities are calculated to be overvalued by 20% or more. Three sectors are calculated to be overvalued.

Skinny Cat

--Caterpillar Announces Three-Year Layoff Plan

We can look at a variety of leading indicators for the global economy: dry bulk shipping, commodities prices, construction equipment sales, etc. Today we find that in one area--construction equipment--the picture over the next few years may be a bit cloudy.

Caterpillar Inc. announced today that they will reduce manufacturing space by 10% and eliminate up to 10,000 employees over the next three years. Included in that potential overall figure is a faster cut of @5000 salaried and management positions by the end of 2016.

CEO Doug Oberhelman noted that "we are facing a convergence of challenging marketplace conditions in key regions and industry sectors--namely in mining and energy. While we've already made substantial adjustments as these market conditions have emerged, we are taking even more decisive actions now."

Oberhelman went on to add that “our strategy is to deliver superior total shareholder returns through the business cycle, and growth is a key element of that strategy. However, several of the key industries we serve – including mining, oil and gas, construction and rail – have a long history of substantial cyclicality. While they are the right businesses to be in for the long term, we have to manage through what can be considerable and sometimes prolonged downturns.”

Consider the big picture here, Caterpillar has been riding a wave of global growth and construction in places such as China as the commodities boom led to big jumps in mining activity in the search for raw materials. Caterpillar was perfectly positioned for that boom with its line of trucks, loaders, excavators, etc. Now that the bust has arrived, it's time to "pay the piper."

Caterpillar also lowered their revenue estimates for 2015 by @ $1 Billion to an overall yearly estimate of $48 billion. This a substantial decline from the past few years--the company booked $66 billion in 2012. The company went even further, noting that they also anticipate a revenue decline of @5% in 2016. That would mean a decline in revenue for four consecutive years--which has never happened to Caterpillar in its history.

Shares took a bath as a result of the announcement--so this is definitely one case where layoffs were not met with a stock price bump. Overall, shares are down more than 40% from their highs just last year.

Below is today's data on CAT:

Caterpillar Inc is the world's largest manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. The company is one of only a handful of U.S. companies that leads its industry while competing globally from a principally domestic manufacturing base. The company records more than half of its sales to overseas customers. Their products are used in the construction, road building, mining, forestry, energy, transportation and material-handling industries.

VALUENGINE RECOMMENDATION: ValuEngine continues its HOLD recommendation on CATERPILLAR INC for 2015-09-23. Based on the information we have gathered and our resulting research, we feel that CATERPILLAR INC has the probability to ROUGHLY MATCH average market performance for the next year. The company exhibits ATTRACTIVE Company Size but UNATTRACTIVE Earnings Growth Rate.

You can download a free copy of detailed report on CAT from the link below.

ValuEngine Forecast
	Target Price*	Expected Return
1-Month	70.17	-0.04%
3-Month	71.57	1.96%
6-Month	73.11	4.14%
1-Year	69.88	-0.46%
2-Year	73.15	4.20%
3-Year	87.24	24.28%

Valuation & Rankings
Valuation	4.90% undervalued	Valuation Rank(?)	48
1-M Forecast Return	-0.04%	1-M Forecast Return Rank	47
12-M Return	-29.79%	Momentum Rank(?)	30
Sharpe Ratio	0.12	Sharpe Ratio Rank(?)	61
5-Y Avg Annual Return	3.19%	5-Y Avg Annual Rtn Rank	61
Volatility	27.33%	Volatility Rank(?)	61
Expected EPS Growth	-27.14%	EPS Growth Rank(?)	11
Market Cap (billions)	42.50	Size Rank	98
Trailing P/E Ratio	12.51	Trailing P/E Rank(?)	81
Forward P/E Ratio	17.16	Forward P/E Ratio Rank	39
PEG Ratio	n/a	PEG Ratio Rank	n/a
Price/Sales	0.80	Price/Sales Rank(?)	71
Market/Book	5.49	Market/Book Rank(?)	21
Beta	1.60	Beta Rank	20
Alpha	-0.33	Alpha Rank	23

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