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Apr 13, 2017

S3 Short Interest Analytics: Shorts Lose $1.1 Billion in CAT since 2016 | Negative Bets Drop

Short interest in the Construction, Farm Machinery & Heavy Truck sector decreased by $763.1 million over the last 30 days, bringing total short interest to $12.8 billion. The top 5 shorts in the sector are in the chart above.

After half a decade of weak demand, short interest in Caterpillar Inc. (CAT) averaged $3.3 billion in 2016, the first time short interest averaged over $3 billion in its history. The weakness in worldwide sales was the cornerstone of short sellers’ conviction, which turned out to be a wrong way bet on CAT. Shorts lost $968.4 million in 2016, down 29.76% for the year, as the stock rallied 36.5% for the year. CAT short interest hit a historical high in October 2016 at $3.7 billion.

Even if CAT management couldn’t spur worldwide commodity and agricultural demand, they could make CAT a more streamlined and efficient company. They succeeded in trimming over $2 billion of expenses, but could not mitigate an 18% drop in revenues, to $38.5 billion, which was the first time CAT’s revenues dropped below $40 billion since 2009. In an effort to lower expenses further, CAT will be closing its Aurora plant and laying off an additional 800 employees.

In addition, an ongoing federal probe into CAT’s tax accounting and a possible fine of up to $2 billion is a gray cloud hanging over this year’s results. There is a fear that an adverse tax result could negatively affect CAT’s top tier CP rating, A3 & A-1, on over $7.1 billion of short term debt and force the firm to pay a much higher rate when it comes time to roll over their debt.

On the positive side of the ledger, increased defense projects and a $1 trillion infrastructure mandate expected from the Trump administration may boost CAT’s near and longer term revenue streams.

After losing nearly a billion dollars in 2016, shorts have covered some of their positions. Short interest has averaged $2.8 billion in 2017 with losses of $98.5 million, or -3.54%, year-to-date. Overall, short interest is now $2.4 billion, down $732 million, or 23%, for the year.

There are several balls in the air for CAT: will cash flows continue to be sufficient enough for the firm to continue to pay its $0.77 quarterly dividend? Will its tax probe result in a $2 billion fine? Will the $1 trillion infrastructure mandate begin early enough to boost 2017 revenues? Will miner’s Capex stabilize with commodity prices possibly bottoming out? Will CAT be able to continue its cost cutting and maintain healthy margins in its slowing business sectors?

With short interest pulling back slightly in 2017, it looks like short sellers are losing some of the conviction in their shorts after being burned with over $1 billion in losses since 2016. If short interest continues to fall, we can assume that CAT is getting better at juggling.

Want deeper insight into the above analysis? Contact:
Head of Research, S3 Partners

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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