Sunday, June 22, 2014

The Caterpillar Way

I recently read "The Caterpillar Way" a 2014 book by Craig T. Bouchard and James V. Koch about the recent history (since 1980 or so) and prospects of the Caterpillar corporation.  I picked if off the new book shelf of my local library because I bought some Caterpillar stock last year without actually knowing much about the company.  If this largely laudatory book is correct I made a good investment.  Unfortunately the book isn't entirely convincing.

The authors were looking for a success story to write about and chose Caterpillar.  So it isn't surprising that on the whole Caterpillar performed well over the period covered by the book.  After bouncing around under 10 (split adjusted) in the 1980s the stock has risen to over 100 today. Of course the market as a whole was also up sharply from 1980 to 2000.  The authors' attribute Caterpillar's performance to a combination of good luck (in the form of favorable economic trends like a depreciating dollar) and excellent management.  The problem being of course this makes some regression to the mean likely.  Warren Buffett has been quoted to the effect that he preferred to invest in companies that were in such a good business that they could be successfully managed by an idiot (by which he means of course someone from the bottom portion of the range of CEO talent).  Expecting a company to always select above average CEOs seems a bit unrealistic. 

At the end of the book the authors make projections for Caterpillar's stock price in 2020 based on 3 scenarios which I will call no-growth, growth and hyper-growth to which they assign probabilities of 15%, 70% and 15% respectively.  Since they project (reasonably) that the stock will stagnate in the first case (no-growth) but do well in the other cases they judge Caterpillar to be a good investment.  However I would assign the probabilities more like 50% and 50% and 0%.  The authors believe the infrastructure and raw material needs of rapidly growing so called emerging economies will continue to increase demand for Caterpillar's products.  But I am less optimistic, such demand has already increased a lot in recent years and may not have much room for further growth.

Also as the authors acknowledge Caterpillar is in a cyclical  industry and will have bad years.  The stock dropped more than 70% in less than a year in 2007-2008 and similar drops cannot be ruled out in the future.  The stock may prove to be a good investment but it is hardly a sure thing.

The book wasn't officially sponsored by Caterpillar but the authors received high level access and appear reluctant to be too critical.  Caterpillar sells all its products through dealers and the authors portray this as a great and difficult to reproduce advantage for the company.  No doubt this is the company line but I doubt the case is totally one-sided.  The dealer networks of the domestic auto companies are widely seen as a burden that the companies can't easily get rid of (because of state laws protecting dealers).  So I expect there are downsides (or potential downsides) for Caterpillar also.

In summary I doubt this book will be of much interest to people who don't own the stock or have some other connection with the company.  

1 comment:

  1. ...if we could really predict how any company would do several years ahead, we'd all be rich.