How to Avoid the Next Caterpillar

Caterpillar Inc. (CAT) shareholders got a rude wakeup call this morning. CAT shares plunged after the construction equipment giant announced plans to lay off more than 10,000 employees, or 9% of its global workforce, by 2018. This is part of a larger restructuring plan that aims to lower operating costs by $1.5 billion per year.

At face value, I understand why CAT may have looked like an attractive investment to some value investors. It has a 4.3% annual dividend yield, one of the highest in the industry. It trades at just 12 times forecasted earnings.

However, over the past several months, there have been some telltale signs of rough terrain ahead for Caterpillar. So that we can avoid the next Caterpillar, let’s take a look.

International Exposure Analysis

First and foremost, Caterpillar has a huge global footprint. Last year, only 43% of its sales came from North America, and an even smaller portion of that came from the United States. So, Caterpillar is very exposed to headwinds out of China, the Middle East and the Eurozone. In addition, the strong dollar crushes its international sales from countries with weaker currencies.

For these reasons, there is a seismic shift out of large multinational companies, and I don’t expect this to change anytime soon. So, I’d avoid most multinational companies, unless they satisfy the three criteria I’m going to cover next.

Quantitative Analysis

When I’m picking a new stock to buy, I first look at its potential for capital appreciation. For this very reason, I created my Portfolio Grader stock screening system. The cornerstone of my stock selection model is the Quantitative Grade, which indicates the current level of institutional buying pressure backing a stock.

If you visit CAT’s Portfolio Grader page, you’ll see that it outright fails on buying pressure, with an F-rated Quantitative Grade. This means that all of the “smart money” has fled the stock, which doesn’t bode well for future performance.

Fundamental Analysis

My other main consideration is the company’s fundamental health. This is captured by my Fundamental Grade, and the eight sub-metrics: Sales Growth, Operating Margin Growth, Cash Flow etc. CAT barely squeaks by, with a C-rated Fundamental Grade. In particular, its sales growth and earnings growth fail. And, if you look at the latest analysts’ EPS estimates, you can see that Caterpillar Inc. isn’t expected to turn itself around anytime in the next several quarters.

Dividend Analysis

Finally, because CAT is a high-yield stock, it is always worth running it through Dividend Grader, my new stock screening tool. At a glance, you can tell that Caterpillar fails on dividend trend and reliability. So, while CAT may have a solid dividend now, there’s no guarantee that the beaten down company can keep it up.

To summarize, whenever you’re thinking about adding a new stock, especially a multinational company like Caterpillar, it pays to do your research. Fortunately, you have free tools like Portfolio Grader and Dividend Grader at your disposal to help you make an informed decision. And, in this daily blog I’ll continue to cover potential buying opportunities, and pitfalls, in this market.

Sincerely,

Louis Navellier

Louis Navellier

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