Caterpillar Inc. (CAT): A Bad Bet in China

Page 1 of 2

Hindsight is always 20/20. It is often difficult for a company to project future results, just as it is difficult for investors to project how certain moves will affect their investment.  Caterpillar Inc. (NYSE:CAT) has made some questionable decisions that may not affect investor’s as much as it seems.

Caterpillar Inc. (NYSE:CAT) actually released a fairly positive report in regards to the fourth quarter – with earnings being better than expected. Although it may not seem like much, shares increased by 2% early Monday morning (last week). Potentially the biggest news for investors looking at Caterpillar right now is the company’s net income. Investors were rightfully concerned with Caterpillar’s 50% drop in net income due to performance in China. Although management claims they performed their due diligence on the Siwei purchase, it appears the company has a multi-year intentional accounting fraud. It was a good quarter for the company, but not more than half of the acquisition is off the books.

Caterpillar Inc. (NYSE:CAT)With approximately 70% of Caterpillar’s business being derived internationally, the deal looked more promising before it happened. The company was trying to take advantage of the rising economy in China, however many investors will be questioning Caterpillar’s management after letting this acquisition go through. Investors are often hesitant to invest in small-mid cap Chinese companies that appear attractive because they haven’t established trust with investors. It is an entirely different situation when a trustworthy company like Caterpillar says they did their due diligence, and still got the short end of the stick.

Unfortunately, this is the risk of investing in stocks and investors need to understand the importance of diversification among companies, industries, and market caps. Often times investors view acquisitions as an opportunity, yet this is a perfect example as to why acquisitions are generally more of a risk. For nearly five years European investments have been risky, and this was shown when Caterpillar announced expectations of growth in every area except Europe. That shouldn’t go without saying that the United States has also been one of the riskiest markets to invest in for the past several years as well.

It should also be noted that Caterpillar is approximately a $70 billion company and this is only a $580 million write down. So, in the grand scheme of things, it’s a drop in the bucket for such a large company, but investors will still wonder what their definition of “due diligence” really is. Investors need to take this as an example and learn that it is long term implications that demand our attention.  Caterpillar will be fine, and won’t view this as anything but a speed bump financially.

Deere & Company (NYSE:DE) is Caterpillar’s largest competitor with a market cap of $36.2 billion. Deere’s stock has increased nearly 9% in the past three months, and they actually hit an all-time high in late January. In the past decade the company has more than doubled its revenues and more than tripled its stock. The company shows a 2.6% FCF yield compared to Caterpillar’s FCF yield of less than .5%. Deere has been in business for over 175 years and currently holds approximately 50% of all North American Farm equipment. Over the past ten years Deere has invested about 4% of its revenues into research and development annually – far more than most of its competitors.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!