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Caterpillar (CAT) Faces Allegations of Tax Evasion, Lawsuits

Zacks Equity Research

The world's largest maker of construction and other heavy equipment, Caterpillar Inc.’s CAT shares have gone down 1.8% since Mar 2 as Federal agents raided its corporate headquarter on tax evasion allegations. Following the news, Caterpillar's share price fell $4.22, or 4.28%, to close at $94.36 per share on Mar 2, 2017, wiping out more than $2.4 billion of the Peoria, IL-based company's market value. This was the worst loss for the stock in a day since June 24, 2016 when it had plunged 7%.

Over the last week, law Offices of Howard G. Smith and Kahn Swick & Foti, LLC announced an investigation on behalf of Caterpillar’s investors concerning the company and its officers’ possible violations of federal securities laws. Khang & Khang LLP and Pomerantz LLP also announced the filing of class action lawsuit against Caterpillar.

On Mar 2, law enforcement officials raided Caterpillar’s corporate headquarters as well its two facilities in Peoria, IL to execute a search and seizure warrant. 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.

Soon after, 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.

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. Caterrpillar remains firm on the ground that it has not broken any federal tax laws.

The present incident comes at an inopportune moment as President Trump recently 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.

Caterpillar, Inc. Price

Caterpillar, Inc. Price | Caterpillar, Inc. Quote

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 on 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. This will impair the company’s efforts to regain footing in the construction and mining markets. For the time being, it will 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 32.6% bore the impact of this announcement and has fallen behind the Zacks categorized Machinery – Construction/Mining sub industry’s gain of 34.1% in same time frame.

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

Some better-ranked stocks in the same space include ACCO Brands Corporation ACCO Parker-Hannifin Corporation PH, and Altra Industrial Motion Corp. AIMC. ACCO Brands generated a positive average earnings surprise of 24.74% in the trailing four quarters and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Parker-Hannifin has delivered an average positive earnings surprise of 12.44% in the last four quarters and also sports a Zacks Rank #1. Altra Industrial Motion has a positive average earnings surprise of 12.49% in the last four quarters and carries a Zacks Rank #2 (Buy).

Want to learn more about Caterpillar's legal troubles? Check out the latest episode of the Zacks Friday Finish Line Podcast:


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