Caterpillar, GE Seen as Potential Activist Investor Targets

  • Textron, Deere also rank high on Bloomberg Intelligence list
  • Model considers sales growth, margins, stock performance

Look out Caterpillar Inc., Textron Inc. and Deere & Co.: You’re showing the telltale signs that you might be targeted by activist investors.

Each company ranks high among industrial peers in a new Bloomberg Intelligence model assessing the likelihood of activist interest, based on yardsticks such as sales growth, profit margins and stock-price trajectory. The report also points to General Electric Co., which revealed a $2.5 billion stake held by Nelson Peltz’s Trian Fund Management LP in October.

“Industrials have been a sector where activism has been rampant,” said Joel Levington, a credit analyst with Bloomberg Intelligence. The report attempts to identify “who might be next. There is opportunity for improvement in both the investment-grade and high-yield names that are being signaled here.”

Big-name investors such as Peltz, Bill Ackman and Carl Icahn have driven a surge in shareholder activism, targeting companies from GE to J.C. Penney Co. and PepsiCo Inc. Investment from activists can lead to an immediate bump in stock prices and tends to improve shares more than when change is driven internally, Levington said. It also tends to have a negative impact on bondholders, he said.

Caterpillar, Textron and Deere declined to comment on the report.

Activist Potential

Caterpillar and Deere are being hampered by weak end markets in mining and agriculture, and they may benefit from less spending on research and development, said Bloomberg Intelligence analyst Karen Ubelhart. Caterpillar also has struggled with inventory management, raising the “potential to attract activist interest,” she said in a report.

Deere is partially owned by Warren Buffett’s Berkshire Hathaway Inc., which has shown a willingness to be more aggressive through a partnership with 3G Capital, Levington said.

In a study of 12 companies, he found that shares rose an average of 43 percent following activist investment, while companies that made their own operational adjustments fell 20 percent. Outside agitators tend to push for broader overhauls than company managers, Levington said.

“When it’s activist-initiated, the performance seems to be much better,” he said.

Trian, GE

Trian’s involvement kick-started GE’s stock revival, leading to its best quarter in more than six years. The shares have gained 20 percent since the investment firm said in October that it had bought 98.5 million shares.

While Peltz at the time said GE was “undervalued and underappreciated by the market,” he has avoided calling for major changes. Instead, he endorsed a transformation already under way that includes the sale of the bulk of the finance operations and the development of a software business.

A GE representative declined to comment and instead referred to Chief Executive Officer Jeffrey Immelt’s comment from October when he said that the company “is focused on improving margins and returns, reducing costs and the size of corporate, returning capital to shareholders and realigning our portfolio.”

Trian has reduced its position in GE to about 74.2 million shares, according to regulatory filings.

“It’s not unreasonable to think that somebody else might come in if they saw opportunity to improve the business,” Levington said.

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