Donald Trump Comments May Unearth Caterpillar Activist

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Billionaire Donald Trump
"People are buying Komatsu tractors instead of Caterpillar tractors. I’m telling you, we’re in trouble" Chief Executive Officer of Trump Organization Inc. Donald Trump said. Photographer: Daniel Acker/Bloomberg

Donald Trump is right about one thing: Caterpillar Inc. isn’t doing so well.

The Republican presidential candidate has made an example of the $47 billion construction-equipment company in his message that the U.S. is lagging behind other nations in growth and trade.

“People are buying Komatsu tractors instead of Caterpillar tractors. I’m telling you, we’re in trouble,” Trump said in an interview on MSNBC’s Morning Joe in June, referring to Caterpillar’s Japanese rival, Komatsu Ltd.

Caterpillar has been a disappointing stock for some time, and in July it hit the lowest price in almost four years. The shares are down 15 percent year-to-date, their worst performance since the construction market dried up during the recession in 2008. Caterpillar’s revenue has slid by about 7 percent on average over the past three years, and analysts predict an even bigger drop this year.

The company isn’t alone. Downturns in the mining and oil and gas markets have taken a toll on scores of businesses, including Caterpillar’s closest competitors, such as Joy Global Inc. But while Caterpillar weathers a bad cycle, there may be some changes it can make in the meantime to assuage shareholder frustration. Sometimes it takes an activist to bring those options to light.

“With terrible end markets, Caterpillar’s management is somewhat limited in its actions on that front,” Kwame Webb, an analyst for Morningstar Inc., said in a phone interview. “But based on my conversations with various investors, there does seem to be a feeling that management probably could be doing more and be a little more proactive.”

Rachel Potts, a spokeswoman for Peoria, Illinois-based Caterpillar, declined to comment.

Past Precedent

Lackluster performance has drawn activist investors to other industrial companies, including Nelson Peltz’s Trian Fund Management to Ingersoll-Rand Plc and Ralph Whitworth’s Relational Investors to Illinois Tool Works Inc. In both cases, their activism focused on operational improvement to boost returns, rather than just reassessing shareholder payouts.

Similarly, an activist at Caterpillar may focus on sprucing up its operations, said Joel Levington, an analyst for Bloomberg Intelligence.

Inventory Issues

Caterpillar’s inventory days -- or how long it holds onto machinery before being able to sell it -- are at the highest level since 2013, when the ratio reached a more than 15-year high, Levington said. While Caterpillar said last month that inventory will fall in the second half of the year, more can probably be done.

A Caterpillar Inc. excavator sits outside the Altorfer Cat dealership in East Peoria, Illinois.
A Caterpillar Inc. excavator sits outside the Altorfer Cat dealership in East Peoria, Illinois.
Photographer: Daniel Acker/Bloomberg

“Their inventory stands out as one issue that still needs to be rectified,” Levington said in a phone interview. “That is a constraint on cash flow and on profitability.”

The company earned about 10 cents in operating profit for every dollar of sales in the past 12 months, down more than 20 percent from the same period in 2012, according to data compiled by Bloomberg.

Caterpillar could also go deeper in its cost cutting, said Morningstar’s Webb.

“There’s probably some more room for them to tighten their belt on the manufacturing side,” he said. “I could probably see somebody wanting to help them revisit their capital allocation in terms of investment priorities and figuring out which markets are appropriate to chase.”

Deal Options

Caterpillar has said it could make acquisitions related to oil and gas. Webb thinks the company should wait.

It bought mining-equipment maker Bucyrus International Inc. for $8.6 billion in 2011, just before the commodities slump. Goodwill has since remained above $6 billion. It also had to write down the 2012 purchase of a Chinese mining-machinery company.

Even though breakup plans tend to be popular among activists, Caterpillar probably shouldn’t divest those businesses now. The value has since fallen and it’d be tough to find buyers.

While Trump’s point was that Caterpillar’s challenges are part of a bigger discussion on America’s competitiveness, the company still may need to do more for shareholders or be prepared for an activist.

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