• Famous short-seller Jim Chanos is only half-right about Caterpillar.

In 2013, Chanos announced that Caterpillar was his best short idea at the time. More recently, he has reiterated that his short position in the firm still stands. His original investment thesis was based on two ideas: 1) strong demand from Chinese infrastructure projects had created a commodity super-cycle peak that was on the verge of collapse, and 2) Caterpillar used dodgy accounting in several of its acquisitions.

Indeed, Chanos has been remarkably accurate about the extreme drop-off in Chinese basic materials demand and in his contention that some acquisition accounting was dodgy (CAT had to write down a Chinese acquisition because of poor due diligence).

Our perspective on commodity super-cycles is this: While there is some historical evidence that they exist, we are cautious to extrapolate historical examples in the present case. We think that the firm’s worst-case near-term revenue scenario is more likely to be flat than falling for reasons explained within the body of the full report. Regarding Caterpillar’s recent acquisitions, we think there is still a chance for negative news to be announced in this area, but would view the announcements as having a minimal effect on the value of the firm, if not on the price of the stock.

We do see the possibility of an investable fall in Caterpillar’s share price, but the economics of Caterpillar’s price falling to the average between our best- and worst-case valuation scenarios is not terribly compelling while the stock is trading in the mid-$90 range. A professional investor gets paid even when they are half-right. A principle owner of capital, however, only gets paid by being wholly right.

  • Caterpillar is a very well-managed company.

A former boss once advised the author of the report to be cautious when shorting a good company, and we think this is good advice for Caterpillar bears. Our proof of this contention is that even though the firm sells into volatile end markets dependent on commodity prices and government spending projects, since 1989, it has maintained profitable operations every year but one (1992) when viewed on an Owners’ Cash Profit (OCP) basis. That is an impressive feat.

  • Trump’s economic policies are not likely to be an undiluted positive for the firm.

President-elect Trump’s infrastructure spending proposals have the potential to benefit a revenue stream that now makes up roughly one-third of Caterpillar’s total sales. Even if the spending boosts Caterpillar’s domestic sales by 10%, that still provides a revenue tailwind of just over three percentage points. While better than a sharp stick in the eye, this boost would put Caterpillar’s near-term revenue growth closer to our worst-case estimates than to our best-case ones, all else held equal. Possibly offsetting this potential tailwind is the fact that over half of Caterpillar’s sales are generated overseas, and these revenues would be damaged in a trade war that looks increasingly likely the closer we get to inauguration.


This is the introduction to a 17-page valuation and investment strategy report on Caterpillar (CAT) available to IOI members. To view the entire report, please consider taking a trial subscription, the first month of which is complementary.