Accounting problems
Caterpillar has further stumbled in China with accounting problems. In June 2012, Cat bought Era Mining Machinery for $734 million. Unfortunately, it discovered accounting problems and had to take a non-cash charge of about $580 million. While that may not be much for a market capitalization of over $50 billion, the write-down is a symbol of the missteps that Caterpillar has made in China.
Competitors
Joy Global Inc. (NYSE:JOY) is a manufacturer of mining equipment for the extraction of coal and other minerals and ores. Joy Global is more levered to China than Caterpillar because it has a smaller market cap of $5.2 billion versus Caterpillar’s $53 billion, and it paid $1.4 billion for International Mining Machinery Holdings in 2011 versus Caterpillar’s $734 million acquisition of Era.
With China slowing, the same macro fears that overhang Caterpillar’s stock are occurring to Joy Global Inc. (NYSE:JOY), thus causing a more than 20% drop in the share price year to date. Even more concerning is that Joy has goodwill and intangible assets that account for over 60% of total equity. One positive for Joy Global is that it is priced at a better valuation than Caterpillar Inc. (NYSE:CAT), with shares trading at 8 times next year’s earnings.
Deere & Company (NYSE:DE) manufactures and distributes agriculture equipment, construction, and forestry equipment. Between the three companies, Deere & Company (NYSE:DE) is the least dependent on China because its main source of income is agricultural equipment, which should see higher demand as the world population grows. Last year, 81% of Deere’s total revenue came from the agricultural segment.
The agricultural segment is growing at 13%, primarily due to higher shipper volumes and improved price realization. Deere is priced around Caterpillar’s valuation, with shares trading around 10 times this year’s earnings and 9.61 next year’s. Analysts are bullish on this company with a price target of $95, or 15% above current levels.
Conclusion
It is very hard to call bottoms. Right now, long-term investors in Caterpillar Inc. (NYSE:CAT) would do well by sitting on the 3% dividend yield. Short-term investors should not get into the Caterpillar because if Chanos is right, there will be more room to fall. Of the three companies, Deere is the strongest because it has a strong focus on agriculture, which should be a growing field in the future. Joy Global and Caterpillar stock are speculative investments until China turns around.
The article Caterpillar: Buy Now or Wait Until Chinese Macro Fears Subside? originally appeared on Fool.com and is written by Jason Bond.
Jason Bond has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Jason is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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