De-Constructing the Bull Case for Owning Shares of CaterpillarAt headline level, investors who own CAT common shares expect to profit as a growth trajectory takes firmer shape globally and especially in rising economies. One of 30 components in the Dow-Jones Industrial Average since May 1991, CAT seems to be a solid, globally accepted brand that should prosper even through the cloudy future as it has done for decades since 1925. The equipment it manufactures and sells moves and powers the world.
If you do not already own CAT common shares, is this a good time to jump on board? CAT data by YCharts
Technical analysis might suggest that there is little downside in CAT and realistic hope for regaining three-digit pricing based on levels attained in the recent past. Furthermore, CAT prides itself on paying a stream of cash dividends that has risen consistently for years. The last four quarterly dividends totaled $2.08 per share and management likely will soon boost the quarterly dividend even higher. With a current yield around 2.4 % and likely headed upward, why not sock some dead cash into purring CAT shares?
A Structural Case Against Owning CAT NowExtraordinary measures taken by major governments and central banks have artificially supported economic activity and simply deferred the inevitable day of reckoning when global capacity will be "right-sized" closer to intrinsic ("unfinanced") demand for the suite of products and services offered by CAT.
Taking a Long-Term ViewTechnical analysts may argue that looking back over years at available data simply muddies the waters. In a sense, these analysts are correct. However, their conclusion actually supports the surprising 30,000-feet view, the stock's movement since 1999. In that year, companies like CAT, GM and GE were basking then in the glow of a long tear upward as they fretted about what may happen with "Y2K." Unlike Internet start-ups, these behemoths had solid brick-and-mortar footprints, commanding global market position and robust competitive advantages.
Subsequently, as companies like Google ( GOOG) and Facebook ( FB) emerged out of university dorm rooms, "legacy" companies like CAT, GM and GE approached or hit the wall between September 2008 and June 2009. Before 1999, analysts accorded intangible value to companies with "assembled workforces." In 2013, some see large pools of employees and retirees as daunting liabilities. Companies are taking every opportunity they can find to trim employment costs in the U.S. and in other high-cost nations with slow-growth populations. To jump into the water with CAT common shares, you should first study macro-economic data carefully for each of the major markets where CAT's end-use customers reside. We accept that this type of data has many limitations but, given that, we feel it argues against a realistic growth case. Next, you should examine accounting conventions used to produce balance sheets and other financial information for the world's largest and most active central banks. In our view, some of these Central Banks have painted themselves into a corner -- even they cannot find enough solvent counterparties to hedge against an inevitable return to more "normal" nominal interest rates.
At the outside, we are talking months before hibernation is over. But who knows -- watching the way things move in murky geo-political waters and hyper-active domestic politics, the bears could return to town sooner than most expect. At the time of publication, the author had no positions in any of the stocks mentioned. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage. Charles Ortel is managing director of Newport Value Partners LLC, which provides independent investment research to professional investors.