Good afternoon everybody, welcome to this part of the conference, Destroying Alpha.
Chanos’ newest short idea is the machinery giant Caterpillar Inc. (NYSE:CAT). Despite being an American stable and a Dow-30 stock, Chanos believes the company has too much exposure to the wrong products at the wrong place in the cycle.
Caterpillar Inc. (NYSE:CAT) is the world’s largest maker of earth-moving equipment, which you probably already know, but it’s also the biggest maker of electric power generators/engines and mining equipment. The company’s equipment can be found in nearly every country across the world, with nearly 70% of its revenue generated from outside of North America.
However, revenue is expected to fall 8% in 2013 after solid 10% growth in 2012. The company lowered expectations due to poor mining sales for 2013. Specifically, the company expects sales related to mining machines to fall 50% from 2012 levels, while sales from the Bucyrus acquisition are expected to fall 15%. Speaking of the Bucyrus acquisition, Chanos believes the accounting is too aggressive and that earnings could be lower.
Chanos also got a big win earlier this week when Caterpillar Inc. (NYSE:CAT) reported fiscal 2Q results. The company posted EPS of $1.45 compared to consensus of $1.70; profits were down 43% year-over-year.
Even still, 1Q backlog was $20.4 billion, flat year-over-year. If you can look through the near-term pressures, the longer term could be bright for the company. Analysts expect the company to grow EPS at an annualized 20% over the next five years, putting its PEG ratio at a low 0.6.
The counter play
While I can understand, to some degree, Chanos’ enthusiasm to short Caterpillar Inc. (NYSE:CAT), I think investors could make a long bet on one of Caterpillar Inc. (NYSE:CAT)’s major peers and see solid returns. Deere & Company (NYSE:DE) is this counter play. Deere & Company (NYSE:DE) is the world’s biggest producer of farm equipment, and is a large maker of construction machinery and lawn and garden equipment. The agricultural and turf segment makes up 75% of the company’s revenue. This segment makes tractors, loaders, and cotton harvesters.
Revenue is expected to be up 8% in fiscal 2013, and another 5% in 2014, after a 13% rise in 2013. The big tailwind for Deere & Company (NYSE:DE) should be a bustling farm economy. Farmers are expected to harvest a total of 14.4 billion bushels of corn according to S&P, up 34% annually.
Deere & Company (NYSE:DE) also has a solid balance sheet and cash flow, helping support its 2.5% dividend yield. Deere & Company (NYSE:DE) recently hiked its quarterly dividend by over 10% to $0.51. What’s more is that the equipment maker hopes to boost its dividend payout ratio to between 25% to 35%, compared to just 25% currently.
Tech short
One of Chanos’ other big shorts is Hewlett-Packard Company (NYSE:HPQ). Chanos has been calling Hewlett-Packard Company (NYSE:HPQ) the ultimate value trap for over a year. HP is the maker of printers, servers and PCs. Chanos was sure to point out that the server business will not save HP nor Dell Inc. (NASDAQ:DELL).
