Club holdings Caterpillar (CAT), Emerson Electric (EMR) and Pioneer Natural Resources (PXD) are in the news Monday. Here are the headlines and the implications for the Club’s investment thesis for each. Caterpillar’s agreement with UAW CAT YTD mountain Caterpillar (CAT) YTD performance The news: Caterpillar has agreed under a recently reached tentative contract deal with the United Auto Workers not close additional plants represented by unions, according to The Wall Street Journal . The construction and mining equipment company has a history of closing plant operations and moving production from union work locations in the Midwest. Over the six-year life cycle of the new contract, base pay for union workers will increase by 19% along with guaranteed bonuses for some 7,000 employees. News of a tentative deal with the UAW last week sent Caterpillar shares soaring higher. The stock, which fell modestly Monday, has gained nearly 6% year to date. The Club’s take: The agreement reached between Caterpillar and the UAW doesn’t change our investment outlook on the company, but it’s always good to see a potential strike averted. Caterpillar’s end markets and the need for infrastructure upgrades remain supportive of future growth. Moreover, given the company employs around 100,000 people, and only roughly 7,000 are represented by the union, any financial impact should be manageable. At the same time, this higher labor cost could represent a challenge to CAT’s profit margins. We started a position in Caterpillar back in January because it’s the world’s leading manufacturer of construction and mining equipment that is well-positioned to benefit from the federal government’s infrastructure spending bill, which will likely increase the number of infrastructure and manufacturing projects this year and in 2024. We’re impressed to see that the company was able to weather inflationary manufacturing costs by raising prices and delivering higher operating margins in its fourth quarter earnings on Jan. 31. We expect demand in Caterpillar’s end markets will lead to top-line and earnings growth ahead which is why we would see any weakness as a buying opportunity. We reiterate our 1 rating on the stock. Emerson’s decline is overblown EMR YTD mountain Emerson Electric (EMR) YTD performance The news: UBS upgraded its rating on American industrials giant Emerson Electric back to a buy but lowered its price target by $3-per-share to $97. The analysts at UBS, who previously downgraded EMR to neutral (hold) on Jan. 4, argued the recent selloff in the stock is “overdone.” Emerson shares declined after the company launched a takeover bid for National Instruments (NATI) that went hostile. Shares of EMR, while up 2% on Monday, have dropped roughly 9% year to date. UBS is critical of Emerson’s potential NATI deal but said the $10 billion market cap loss since it was announced “seems excessive” relative to the $8 billion acquisition offer. At its current valuation, EMR trades at a 10% discount to its peers while delivering similar top-line growth and higher margins, analysts argued. The Club’s take: UBS’ upgrade on Emerson is notable because the firm only just recently issued a downgrade. We agree with UBS that Emerson’s market cap decline after the National Instruments hostile takeover news is too much. We also agree that EMR stock has an attractive valuation. This was one of the driving factors behind our investment case on the stock when we initiated our position back in December. If management were to walk away from the NATI deal, the stock could turn higher since its industrial peers have rallied to start the year. We’ll be keeping an eye to see how Emerson’s bid for National Instruments plays out, but we hope the company keeps discipline and doesn’t stray too far from its $53 per share offer. ‘Never a deal,’ Pioneer CEO says PXD YTD mountain Pioneer Natural Resources (PXD) YTD performance The news: In a wide-ranging CNBC interview Monday, Pioneer Natural Resources CEO Scott Sheffield passionately refuted a report that the Texas-based shale producer was in talks to acquire natural gas-focused Range Resources (RRC). He also made the case that oil prices would climb higher throughout the year and defended the industry’s constrained approach to production increases, saying “people just don’t have the capital to grow.” Sheffield said Monday both employees and shareholders were taken aback by Bloomberg’s report on Feb. 24 that Pioneer was considering a purchase of Range Resources. Pioneer shares fell more than 4% that day, closing at $196 apiece. The stock traded around $209 per share Monday. “There was no deal. There was never a deal. So, we were never contemplating any deal with Range Resources,” Sheffield said. While predicting oil prices is a tough game, Sheffield said he believes the fundamentals support an increase in the coming months. West Texas Intermediate crude, the U.S. oil benchmark, has traded in a general range between the low $70s and around $80 per barrel since late November. “We’re definitely at a bottom. The question is, ‘When do we break out?’ I predict sometime this summer we’ll break past $80 WTI on the way to $90 a barrel,” Sheffield said. Club take: We’re pleased to hear Sheffield double down on Pioneer’s denial of the Range Resources report. Like other investors, we were not thrilled by the prospect of Pioneer — whose oil-focused operations are focused on Texas’s Permian Basin — buying a company with a primary presence in Appalachia’s Marcellus Shale region. Only time will tell whether Sheffield’s WTI forecast comes to pass. But more generally, it’s worth pointing out that higher oil prices should, in theory, enable Pioneer to generate more free cash flow, which can be returned to shareholders via dividends and buybacks. Pioneer reduced its quarterly fixed-plus-variable dividend when it reported Q4 results last month. The Club continues to ponder whether to continue owning three different exploration and production companies: Pioneer, Coterra Energy (CTRA) and Devon Energy (DVN). (Jim Cramer’s Charitable Trust is long EMR, CAT, PXD, CTRA, DVN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Caterpillar Inc. excavators are displayed for sale at the Whayne Supply Co. dealership in Louisville, Kentucky.
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