Jim Chanos Is Shorting Caterpillar Inc. (CAT), Should You?

Joy Global Inc. (NYSE:JOY) is another mining equipment company. Joy Global Inc. (NYSE:JOY) is in fact a somewhat popular short target, with 13% of the float held short, and it too has at least recently been experiencing significant declines in both revenue and net income. The stock trades at a considerable discount to Caterpillar Inc. (NYSE:CAT), at only 9 times forward earnings estimates, suggesting that the market has already priced in moderate declines in EPS at Joy Global Inc. (NYSE:JOY). The sell-side is optimistic here as well, and as a result the five-year PEG ratio is 0.9. Other farm, construction, and other equipment companies which can also be compared to Caterpillar include CNH Global NV (NYSE:CNH), Deere & Company (NYSE:DE), and Terex Corporation (NYSE:TEX). These three peers carry forward P/Es in the 9-10 range as well, and while they do have significant macro exposure they could be thought to be less dependent on mining as a source of business. Deere & Company (NYSE:DE) is the only one of these three companies that has been experiencing modest revenue growth, though there margins have been contracting a bit resulting in only 3% higher earnings in its most recent quarter compared to the same period in the previous fiscal year.

We’ve liked Caterpillar in the past, but more recently the company’s recent results have suggested potential trouble ahead even at its fairly low valuation. In addition, it is valued at a premium to its peers and by late June we’d recommended avoiding the stock. Chanos’s views on mining capex are also worth taking into account, and so selling Caterpillar or forming some kind of pair trade with an equipment company less exposed to mining may be wiser than owning it right now.

Disclosure: I own no shares of any stocks mentioned in this article.