In case you missed it, Caterpillar (CAT) was down 6.25% yesterday making a new 5 year low after pre-announcing results that were much worse than expected. CAT is now down 42% from its 2014 high:
So what happened from $107 in November 2014 until now? The dollar happened. The DXY (dollar index) at one point was up 25% from its 2014 lows to its March 2015 highs, and is now up about 11% from November 2014 when CAT was at its 52 week highs:
The dollar rally was ignited by the end of 5 years of Quantitative Easing. That caused an implosion in commodity prices at at time when demand was slowing for said commodities from the single largest cause of demand for the last 10 years, China. In 2014, CAT got more than 60% of its sales from outside the United States. So for a company that in the aftermath of the great recession benefited greatly from the reflation of global growth and a weak dollar making their products attractive overseas, the change of events in the last year have been the stock and the company’s undoing (consensus calling for a 26% year over year drop in earnings and 12% drop in sales in 2015).
One more thing, the company had been spending almost every dollar of free cash flow in 2013 and 2014 to buy back their stock to manage earnings. In fact in those two years the company felt the need to accelerate their purchases in form of Accelerated Share Repurchase Agreements (ASRs). Let’s follow the money for the last couple years (these are in addition to their regular buybacks and dividends):
July 29, 2013: CATERPILLAR ANNOUNCES $1 BILLION ACCELERATED STOCK REPURCHASE PROGRAM
January 30, 2014: CATERPILLAR ANNOUNCES COMPLETION OF $7.5 BILLION REPURCHASE AUTHORIZATION WITH $1.7 BILLION ACCELERATED STOCK REPURCHASE TRANSACTION
July 29, 2014: CATERPILLAR ANNOUNCES $2.5 BILLION ACCELERATED STOCK REPURCHASE
July 28, 2015: CATERPILLAR ANNOUNCES $1.5 BILLION ACCELERATED STOCK REPURCHASE
As of today CAT has a market cap of $40 billion, and in 2013 and 2014 the company bought back in ASR’s about $ billion worth of stock, and nearly 18% of their current market cap in a range of $80 to $107!! If they were buying because they thought the stock was cheap, they were clearly wrong with the stock now at $65.
So here is a fairly despicable example of a company using access to cheap cash to fund share buybacks (to manage earnings) and then watching that money go up in smoke while losing investor credibility. As the FOMC is set to raise rates this year, ASRs may be a thing of the past, and keeping track on which of your equity holdings have thrown good money after bad may be like herding cats.