Caterpillar Inc. (NYSE:CAT), which announced recently it will abandon its long-time headquarters in Peoria, Illinois, for the bright lights of Chicago, may never get there. A tax scandal has suddenly made CAT stock vulnerable to an exodus, and the company vulnerable to takeover.
Caterpillar, the premium maker of heavy equipment, made the announcement in January. But it has followed that up with allegations of criminal tax fraud.
Investors are not amused.
CAT stock is down 2% in the premarket. A March 1 raid halted a rally in the company’s stock, which before then had advanced 6% on the year. Those gains may be entirely wiped out by noon on March 8, as traders digest the latest news.
What CAT Supposedly Did
Specifically, Caterpillar is accused of moving profits from the U.S. into a Swiss subsidiary called CSARL so they could be taxed at a lower rate. At a 2014 Senate hearing, the company was said to have saved $2.4 billion over 13 years with the practice. The company’s security findings show the IRS is seeking to claw back $2 billion, and said the company is contesting it.
The new charges go well beyond what had previously been revealed. These investigations are being carried out by U.S. Attorneys and agents of the Federal Deposit Insurance Corporation — people who handle criminal matters.
Our Tim Biggam warned investors about all of this on March 6. He said that CAT stock got a “Trump bump” after the election of 15%, but the scandal — under which Caterpillar got a negotiated tax rate of 4%-6% instead of paying the U.S. rate of 35% on earnings — and a negative technical chart will put the stock under pressure.
The new charges put the Trump administration in an awkward spot. The president wants companies to repatriate profits and invest them in the U.S. economy, and has proposed lower tax rates to do just that. Caterpillar CEO Douglas Oberhelman met with the president just last week to discuss creating more American jobs.
How Bad Is the Damage?
Caterpillar employees, however, were bracing for job cuts after a fourth quarter where the company reported a loss of $1.17 billion ($2 per share), which wiped out its entire profit for the year and left it with a loss of $67 million.
The job cuts announced after earnings were expected to save $1.5 billion in operating costs and bring costs back into line with revenue. The restructuring costs lowered its outlook for 2017 earnings.
But until the recent raids, the problems were not badly impacting CAT stock, partly because the dividend has remained at 77 cents per share since 2015, partly because of the Trump bump, and partly because Caterpillar management had a good reputation for managing downturns. Since the start of 2016, in fact, Caterpillar shares are up 51% — even with revenue down to barely half its 2012 level and a balance sheet that has nearly half its assets subject to debt.
Now, traders are taking note of four years of declining relative strength, measured against other members of the Dow Jones Industrial Average, and taking down price targets into bear market territory.
Can CAT Stock Survive?
A cat is said to have nine lives, but depending on how far CAT stock falls, it could become vulnerable to a takeover.
The current market cap of $56 billion is bound to fall and, if the bearish price targets of $54 per share are achieved, the company’s value would fall to the $30 billion range, making a raid by Deere & Company (NYSE:DE) start to look practical. At that value, the company’s importance in heavy industry could even make it appetizing to General Electric Company (NYSE:GE), to one of the major auto companies such as General Motors Company (NYSE:GM) or even to a foreign buyer.
I wouldn’t buy Caterpillar based on the expectation of a buyout, however. It would have to go much lower for that to become attractive. It looks right now like it will go much lower.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
