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Caterpillar (CAT) Faces Federal Tax Probe, Stock Down

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Caterpillar Inc.’s (CAT - Free Report) shares were sent reeling after reports surfaced that Federal agents had raided the corporate headquarters of one of the world's largest makers of construction and other heavy equipment. Consequently, the company’s shares dropped 4.8% to close at $94.36 yesterday. In fact, the stock suffered its worst loss in a day since June 24, 2016 when it had plunged 7%.

The agencies involved in the search included the Internal Revenue Service's (IRS) criminal investigation unit, the U.S. Department of Commerce Office of Export Enforcement and the Federal Deposit Insurance Corp.'s Office of Inspector General. The search was carried out at Caterpillar’s Peoria, IL, headquarters as well as facilities in East Peoria and Morton, IL, under a federal warrant.
 

Caterpillar, Inc. Price
 

Caterpillar, Inc. Price | Caterpillar, Inc. Quote

Caterpillar issued a statement announcing the search was regarding, among other things, export filings that relate to business with its Swiss subsidiary, CSARL. The matter first came to light in the company’s Form 10-K filed on Feb 17, 2015 and updated in its recent 10-K filing with the SEC on Feb 15, 2017.

Notably, two years ago, the IRS had notified the company that it owed over $2 billion in taxes for the years 2010 to 2012 by shifting profits to the affiliate in Switzerland. In its defense, the company stated that the relevant transactions complied with applicable tax laws and did not violate judicial doctrines.

However, the present incident has comes at an inopportune moment as it followed President Trump’s first address to a joint session of Congress just a day before. In this session, Trump reaffirmed his plans to pump $1 trillion of new infrastructure spending into the U.S. economy to fix America's crumbling infrastructure. The prospect of gigantic infrastructure spending is welcome news for infrastructure stocks. As expected, Caterpillar will play a major role in the national infrastructure plan and its shares thus gained 2% following the announcement.

In fact, Caterpillar’s share price has benefited since the victory of Donald Trump as investors expect his plans of big spending in infrastructure would boost Caterpillar’s revenues which had so far borne the brunt of weak mining demand.

Nonetheless, if the allegations against Caterpillar are proved true, this could have a substantial impact the company. Further, it could be restricted from bidding for federal contracts, which would be a big blow given that Caterpillar is touted to be one of the biggest beneficiaries from the infrastructure plan. For the time being, it will be it certainly have a negative impact on the company’s reputation and be an overhang on the stock till the investigations are concluded.



The Caterpillar stock’s one year return of 34.4% bore the impact of this announcement and has fallen behind the Zacks categorized Machinery – Construction/Mining sub industry’s gain of 42.3% in same time frame.

Caterpillar currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same space include Altra Industrial Motion Corp. , ACCO Brands Corporation (ACCO - Free Report) and Milacron Holdings Corp. . All three of these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Altra Industrial Motion has a positive average earnings surprise of 12.49% in the last four quarters. ACCO Brands generated a positive average earnings surprise of 24.74% in the trailing four quarters. Milacron has delivered an average positive earnings surprise of 9.23% in the last four quarters.

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