Caterpillar or Nikola: Which Is the Better Buy Heading Into 2021?

A man named Dewitt C. Thompson V owns 13.1 million shares of Nikola (NASDAQ:NKLA). The startup plans to sell battery-electric and hydrogen fuel cell-powered pickup trucks as well as Class 8 heavy-duty battery-electric and hydrogen fuel cell-powered semi-trucks. 

There are several reasons Thomson has invested in Nikola. 

And while Thomson’s stake makes sense from his own personal business perspective, regular investors might want to consider Caterpillar (NYSE:CAT) stock instead. 

Here’s why.

Thompson’s Interest in Nikola Stock

By this point, you’re probably wondering who Thompson is and why you should care.

For starters, it’s always good to know the backstory behind a new and innovative yet very speculative company. This doesn’t mean you still won’t make a mistake or miss something that will cost you money down the road, but at least you’ll know that you did your best to understand the Nikola situation. 

On Sept. 10, Nikola filed a Schedule 13D ownership form with the Securities and Exchange Commission. It said that Thompson, through Tennessee-based Legend Capital Partners, where he is managing partner, owned 13,144,216 of Nikola’s 360.9 million shares outstanding as of June 3, 2020. That’s good for 3.6% of the company.

Thompson is not just some wealthy guy who plunked down millions to own Nikola shares. He’s on Nikola’s board and has been since July 2017.

In fact, Thompson’s quite a busy person. He’s the chief executive officer of Thompson Machinery, a Caterpillar distributor in Tennessee and Mississippi. He’s also a part-owner of Predators Holdings LLC, which acquired the Nashville Predators NHL hockey team in 2007. 

The Thompson Machinery business dates back to 1944 when Dewitt Thompson, Jr. and business partner George Green started a General Motors (NYSE:GM) truck dealership. They were awarded a Caterpillar dealership shortly thereafter. 

Ironically, Thompson Machinery has partnered with Nikola, trying to close a $2 billion partnership with GM. While the partnership with GM looked to be dead in the water in September after Nikola founder Trevor Milton stepped down as executive chairman, GM CEO Mary Barra said on Oct. 21 that negotiations with Nikola were still ongoing.   

The most direct link Thompson has to Nikola: Thompson Machinery is the authorized sales, service and warranty dealer for Nikola in Tennessee and Mississippi. Also, it will distribute Nikola’s all-electric side-by-side off-road vehicle. 

If you’ve followed the sales of Polaris (NASDAQ:PII) and BRP (NASDAQ:DOOO) in recent years, you’re likely aware that ATV and SSV sales are on fire

So, it makes total sense for Thompson to be investing in Nikola’s future. Their success is his success.

What About Caterpillar?

Based on Nikola’s current share price of $19.58 (Nov. 6 closing), Thompson’s holdings are worth approximately $257 million. That’s a big drop from $1 billion in June, but it’s still a significant amount of money for a business that’s still a work in progress with no actual automotive sales to date. 

The closest ties to Caterpillar I’ve been able to find was the sale of FCC Equipment Financing to Caterpillar’s financial services arm in February 2002. Thompson Machinery formed the joint-venture with Caterpillar to finance equipment purchases.

In August, Thompson Machinery made news for the $15 million it was investing for a new, 10,000 square-foot Caterpillar location outside Nashville. It’s got another one planned for Murfreesboro, so there’s no doubt Thompson sees its Caterpillar business growing over the next few years.

This makes me wonder if the better option for risk-averse investors would be to buy CAT stock, which has had a decent, if not spectacular 2020.

There’s no way of knowing how many shares the Thompson family holds of Caterpillar. It’s likely a substantial amount. 

What I do know is that Caterpillar has an attractive 2.6% dividend yield and $4.4 billion in trailing 12-month free cash flow, allowing it to continue paying its juicy dividend.

In September, I said that Nikola’s future rested on all of the issues causing GM to pause its partnership with Nikola, getting settled with a positive outcome. The possibility that GM walks is still real. If that happens, Nikola’s shares could fall further.

Until this gets sorted, risk-averse investors are better off putting their capital into CAT so that you can be paid to wait for the outcome.

What’s not to like?

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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