Caterpillar Inc: Analyzing Their Recent Acquisition

Ticker: CAT

Rating: Underweight

Price Target: $120

Target Date: 6/2021

Industry View: In-line

Caterpillar Inc. (CAT) announced that they had come to an acquisition arrangement with Weir, packaged as an all cash-sale of its Oil and Gas (O&G) business. This transaction is expected to close by the end of the year and at a mark of ~$400M. Keep in mind cash deals (vs. stock deals) signals the acquiree’s thoughts on the potential of CAT’s go forward business. If they were optimistic about the future of CAT’s business, they may opt for a stock deal in some capacity. But since they decided to go with cash, they could be either looking for immediate liquidity or are choosing not to gamble the deal on CAT’s future. In any capacity we interpret this signal as worrisome, as Weir has had the chance to understand CAT better than the public.

However as part of CAT’s overall strategy, we feel this acquisition falls in line nicely with management’s comments during their recent investor day. Weir has ~40 manufacturing and service locations and adds to CAT’s capabilities in the realm of pumps, flow, iron and pressure control products. This transaction, if completed, would add ~3% to top-line revenue and ~1% to operating income. Overall though O&G represents a more structurally challenged sector within CAT’s end go-to-market. We are bearish on this sub-sector in the long term as the world transitions from fossil fuels to more sustainable sources of energy. Therefore, although we like the acquisition, we believe this investment is not in CAT’s best interest over the long term. While the acquisition will lead to more top-line growth in the short term, in the long term we believe this use of capital would be best invested elsewhere. We therefore have updated our models to reflect our macro views of the O&G industry and call for an underweight holding of the name.