Shares CH Robinson Worldwide and Caterpillar could fall by as much as 35% and 50% respectively according to shortseller presenters at MYST Advisors Bear’s Den dinner.
For both CH Robinson and Caterpillar, the short thesis is based on falling sales in a soft market. Specifically, with Caterpillar the presenter believes that the company has been over shipping for several years, and the used equipment market is very soft with pricing down 10% year-on-year. What’s more, the US construction recovery appears to be on its last legs, and once the big Gulf Coast projects are completed, there will be a big vacuum in demand for Caterpillar’s products.
CH Robinson And Caterpillar Are Victims Of Their Own Success
The short Caterpillar thesis isn’t new. However, now there are some enormous cracks are starting to appear in the construction machinery market. For example, Manitowoc Company recently provided shockingly dismal preliminary numbers for its third quarter and is predicting losses from operations to more than quadruple following double-digit declines in orders and backlogs for new equipment.
On the flipside, in the used equipment market business is booming which validates the thesis that Caterpillar has been oversupplied market and now the company’s chickens are coming home to roost.
The world’s largest heavy equipment auctioneer Ritchie Bros Auctioneers closed its largest-ever auction last month, selling $76 million of equipment in two days. So there is demand for construction equipment, but only at knockdown prices in the second market. For the third quarter, Ritchie Bros reported an 18% year-on-year increase in revenue and total gross auction proceeds of $998.9 million, down slightly from the $1.3 billion in auction proceeds reported for the second quarter. For the first half, the company reported record gross auction proceeds of $2.3 billion.
The presenter expects Caterpillar’s earnings to fall to $2.50 per share at the bottom of the cycle implying a share price of $40 on a 12 times earnings multiple.
For CH, the presenter believes that the company, which books profits on the spread of the transport services it offers, is heading towards a cyclical downturn. Margins are at a cyclical peak, and as contracts are coming up for renewal, they are resetting at lower levels. The company’s most recent quarterly report showed 150 bps of net revenue margin contraction, compared to the Street’s estimate of 50 bps. Overall, margins are currently in the 19% to 20% range and typical trough at around 14%.
JP Morgan analyst Brian Ossenbeck is also pessimistic about the outlook for CH Robinson. Earlier this year he wrote in a note to clients that “CHRW faces a challenging road ahead after the end of what we see as a once-in-a-decade combination of margin expansion and truckload (TL) market share gains.” Margin contraction is once again the focal point of the bear thesis. Ossenbeck continues, “stock performance twelve months after a peak [in margins] was negative twice as often as it was positive.”
Therefore, “EPS estimates could also be too low, but that outcome appears less likely given we expect a more balanced TL market in 2017 will compress broker spreads as new shipper routing guides narrow the substantial spot/contract rate gap.” Finally, the stock is expensive compared to historic comparisons, “the stock’s average historical PEG ratio on a two-year CAGR is 1.0x, reaching 1.5x in 2009, but it currently trades at 2.4x consensus 2016-18E EPS growth.”