In this Market Foolery podcast, Chris Hill, Taylor Muckerman, and Jason Moser consider the odd timing for the departure of Caterpillar (NYSE:CAT) CEO Doug Oberhelman. Though the company has struggled for several years amid the broad decline in mining and energy, the share price has recovered over 20% year to date.
A full transcript follows the video.
This podcast was recorded on Oct. 17, 2016
Chris Hill: Doug Oberhelman, who is the chairman and CEO of Caterpillar, is stepping down. This is going to take place in early 2017. Jim Umpleby ... Caterpillar apparently has something for executives with last names that are difficult to pronounce.
Taylor Muckerman: I was going to say.
Hill: Jim will be taking over as the CEO. Couple of interesting things here. One is they're going to be splitting the chairman/CEO role. I think in general, we're fans of seeing those two roles split. I'm a little surprised at the timing here. Oberhelman has presided a pretty rough stretch if you go back over the last five, six years. But, in terms of the stock, I mean, this is a stock that is up nearly 30% year to date. What did you think when you first heard this news, because you watch this space more closely than I do?
Muckerman: Well, first I thought it's rough couple days, not rough couple days for CEOs, but you see Hershey is changing the guard at the top, and Rogers Communications is doing so as well, all within the last couple days. Secondly, when you look at this company, yeah it's up 30% year to date but it's had a rough couple years. Mining and energy's been in a cyclical downturn. Mining a little bit longer than energy, but you've seen metal prices rally so far into this year. Mostly precious metals, but also some of the more industrial metals as well. So, maybe people thinking that miners are going to start to ramp up some spending, because there have been a lot of cutbacks over the last couple of years.
When you look at the CEO changing over. March 31, 2017, end of that quarter, that's when they're supposed to start coming out with some new projections. So, I think that they feel like that'll be a time where the new CEO, Jim Umpleby, can come in and kind of take ownership over some things that he'll have significant guidance over. So, I think that upfront it might look a little odd that the changing the guard right now, but if you look at what the company has coming up in the next couple quarters, I think it makes some sense. To your point about us appreciating the separation of CEO and chairman roles. It's becoming a much better trend. You look at 21% in 2001 had independent chairmen. You're looking at 44% in 2012. So, that trend is increasing and it is something that we like in terms of corporate governance.
In terms of Caterpillar itself. Even though it's up over 30% year to date, I think it's a great time to look at the company because you're still in a relatively down market for energy and materials. A lot of companies cold stacking rigs both in the energy market and in mining equipment. So, they're just kind of stripping these machines for parts. So, right now no one's turning to Caterpillar for repairs or new machines. But, those machines that they're stripping down for parts aren't going to be available once the cycle flips. Orders are going to start to flow in eventually. Some people think as early as middle of next year, in to 2018. So, for investors with a three, five, 10-year time period that maybe you can live through 5% to 10% downturn over the next year or so. There could be significant upside because Caterpillar stock is generally a first mover when you look at a changing in the cycle.
Hill: Well, and they made a big bet in China that did not work out at all.
Muckerman: Yes, that's true.
Hill: Oberhelman was --
Muckerman: Can't hide from that.
Moser: Don't cupcake it.
Muckerman: Can't hide from that.
Hill: Oberhelman was at the top when that happened, but it does seem like they have turned the corner and finally put that behind them. Both in terms of what that means for operations, but also in terms of their balance sheet. That's why I was a little surprised at this. Then again, he's 63 years old. He's been at the company 35 years. Maybe I should just take it at face value that he is actually retiring of his own accord, and maybe just decided, "You know what? I'd like to take a break."
Muckerman: Well, and they're promoting from within. Jim Umpleby's been there for a long time. He's the head of their most profitable business, the energy and transportation business. So, he's coming in there with plenty of experience. They're still spending money on R&D. Focusing on automated machinery, connected fleets. So, they're helping customers lower cost once they do start buying these state-of-the-art machines. Which I think will probably happen in the next couple years. Revenue's down to like 40% peak to trough, and that's fairly typical for what you've seen from a company like Caterpillar when you do see that cycle change. You could be looking at the bottom or near the bottom with a heck of a lot more upside in my mind.