Previously here at EEON, we wrote about "Lockdown Stocks" that performed extremely well during the coronavirus-induced lockdown period, but have seen negative impact to share price due to the success of several vaccine candidates. Here, we're taking a look at a company that is on the other side of the vaccine news trade: Caterpillar.
Caterpillar, or "CAT" for short, is a mechanical equipment manufacturing organization that builds, finances, and sells (or leases) heavy equipment to an industrial customer base. The yellow, branded mining equipment, diesel engines, gas turbines, and diesel-electric locomotive products Caterpillar produces are a mainstay of roadside construction sides and large industrial projects alike. In its last full fiscal year, Caterpillar generated $53.8B in revenues, $15.7B in gross profit, and $11.1B in EBITDA. Like many enterprises, Caterpillar's year over year revenues are down around 22% compared to prior year due to pandemic related factors, but shares of the firm have been propelled to all time highs by the news of successful vaccine trials by Pfizer, BioNTech, and Moderna.
Caterpillar operates through four primary segments: Construction Industries, Resource Industries, Energy and Transportation, and Financial Products. Per the company's most recent annual report, the Construction Industries and Energy & Transportation segments each generate approximately 40% of the firm's annual revenues apiece, the Resource Industries segments generates around 18%, and the remainder is primarily generated by the Financial Products segment:
The point here is that Caterpillar's customers and revenue sources are very diverse, and thinking through who those customers are (construction companies, resource miners, municipal governments, farmers) gives us some insight into why shares of the firm have reacted so positively to news of vaccine candidates in November of 2020. Essentially, the types of individuals and businesses that are patronizing Caterpillar, buying or leasing their heavy equipment, and financing those purchases through the "Financial Products" segment are, taken together, very representative of the American economy at large. It makes sense that as events unfold that damage the businesses of large contractors, industrial farmers, or resource mining concerns, Caterpillar would also take a hit in the form of fewer orders for their machinery.
Looking at the company's stock ratings reinforces this notion - the company holds a places in EEON's list of lowest risk securities due to its Beta value of 1.02. As a refresher, Beta is a measure of the risk associated with a particular asset relative to the risk inherent to the broader market; if a stock has a beta of 1.0, this means that it is exactly correlated with the market at large, and events that impact the market will impact the stock with equal relative magnitude. Caterpillar is about as close as you can get to a 1.0 Beta stock because of the diversity of its customer base and the role it plays in facilitating so many of the industries that keep the economy chugging along.
Caterpillar's stock ratings also reveal that the company has a TTM return on equity of 22%, a dividend yield of 2.4%, an earnings yield of 3.5%, and a price to sales ratio of 1.73, which given the relative safety of the company's shares, isn't a shabby mix of metrics. The stock market is always forward looking, and as investors start to anticipate a future facilitated by successful coronavirus vaccines, companies like Caterpillar, whose customers are as diverse as the economy itself are likely to see upside.