Famed short seller Jim Chanos of Kynikos Associates was at this year’s CNBC Delivering Alpha conference. He started the conference with…
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.
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).