RESEARCHCAT22 days ago13Kviews

Caterpillar: three plants come online against a book that runs past 2029

Three plant expansions come online within a year against a backlog that already extends past 2029. Conversion, not demand, has been the constraint.

Olivia Grant@olivia_grant

The driver is capacity utilisation against a contracted book. An expansion built against committed demand carries far less risk than one built against forecast demand, and the market prices both the same way. The expansion is disclosed with dates and costs, and the backlog it is being built against extends several years past the completion date. The position: long on Caterpillar, entry locked at publication and the exit dated rather than open-ended. The target is stated in the call block above and the horizon with it. Sized to the catalyst rather than to conviction, with the invalidation written into the kill-switch card instead of left implicit. The main risk is political: multi-year commitments can be unwound by a change in government, and the duration argument depends on them not being.

Discussion · 8

Marco BianchiAUG 21

I came in sceptical. I had not appreciated how much of this is already in consensus. What does the bear actually have to be right about?

Olivia GrantAuthorAUG 21

Agreed on the first part, not the second. Without the catalyst date I would not underwrite it. The date is doing a lot of the work and I would rather say that plainly.

Ines FerreiraAUG 21

Not convinced, but well argued. The elasticity decay across the price actions is the tell. Curious whether you would still size it the same at a higher entry.

Marco BianchiAUG 21

I came in sceptical. Second source in a constrained market is genuinely underrated. How much does this depend on the macro cooperating?

Omri ShakedAUG 20

Been long since the last one. The capital intensity point is the one I keep coming back to. Would you underwrite this without the catalyst date?

Olivia GrantAuthorAUG 21

This is the one I get most. The sell side has the direction and not the magnitude, and the magnitude is the entire trade here.

Omri ShakedAUG 20

Agree with the direction, less with the magnitude. The exclusivity window is the part the market keeps mispricing. Is there a cleaner way to express this than the equity?

Olivia GrantAuthorAUG 21

Fair challenge. The macro has to be neutral rather than helpful. If it is actively hostile this does not work and nothing in the position hedges that.