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The Big CAT Issues an Optimistic Forecast

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October 20, 2009 – Comments (7) | RELATED TICKERS: CAT

I'm tired of all of these earnings beats.  I've basically been so inundated with beat after beat after beat of analysts' estimates that I've become numb to them.  What I'm looking for now in companies is revenue growth.  Companies can only cut expenses for so long.  Eventually they will have to grow revenue to show an improvement in earnings.

Fortunately, one of the major themes of my investment portfolio is foreign companies and U.S. companies that have strong overseas operations.  Even in a flat environment, as long as the value of the U.S. dollar continues to fall these companies will see improvements in their earnings and revenue.

One company's results caught my eye this morning, Caterpillar (CAT).  It beat the consensus earnings estimate by more than ten times, coming in at $0.64/share versus an estimate of $0.06...but that's not what I liked about the its press release.  A company had better be able to show decent earnings after hacking 34,000 people off of its global workforce over the past year.  What I found interesting was the company's optimistic outlook for 2010.

Back in 2007 at the beginning of this mess, CAT was one of the first companies out there to warn that the global economy was slowing.  Today it raised its guidance for the rest of 2009 and for all of 2010.  Here's what the company's CEO, Jim Owens, had to say:

While we are still navigating through a very difficult environment in 2009, we see signs of improving economic conditions throughout most of the world...While 2010 will still be a difficult year, we expect improvement in our top line from the lows of 2009, and it’s critical that we manage on the way up as well as we did in the face of declining volume. As a result, we’ve already started planning for an upturn. When it comes, it can come quickly, and we, our dealers and our suppliers will be prepared.

For 2010, Caterpillar expects its sales and revenues to increase between 10% and 25% from the low of 2009.  That's certainly not back to the bubble-induced roaring sales that we saw several years ago, but I personally didn't expect the economy to get back to that level for a long time.  At this point, any revenue growth is a positive. 

As I have been saying, this looks like it's a long ways from the V-Shaped roaring economic recovery that many are expecting yet it's also far away from the end of the massive Great Depression II meltdown that the people at the other extreme are predicting.  The truth  usually lies somewhere in the middle.

Caterpillar plans for quick economic rebound

Deej

Long CAT bonds that I purchased at the height of the credit market meltdown, but no position in CAT stock.

7 Comments – Post Your Own

#1) On October 20, 2009 at 10:09 AM, rofgile (99.43) wrote:

I wonder how much of the earnings boost is due to the weakened dollar that would help export revenues. 

Also, I noticed that CAT didn't really "raise their profit forecasts", but instead tightened them.  They raised the lower bound, but cut the highest estimate bound from $1.50 to $1.30.

However, the strong statements by the CEO on this being a bottom for the company are very meaningful to me.  

Construction equipment stocks are doing very well lately.  In the last three months, MTW is up 120% !  I recently sold 1/3 my shares, because even I have been surprised at how construction stocks have rallied in three months.  I guess it has been a matter of timing.  

Positive talk of recovery + weak dollar + export company + approaching earnings season = huge upswing (speculation?)

Assuming that we are really continuing in a gradual recovery mode, these are good positions to get into, but even I am playing a little more defensive on MTW lately, and keeping some free cash in case we have a pullback in a month or so. 

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#2) On October 20, 2009 at 10:46 AM, alstry (36.57) wrote:

Deej,

Cats sales are ALREADY down 50%.....we are already WORSE than Great Depression numbers. 

The only reason things are going right now is we are running a $2 Trillion dollar deficit......soon that will have to stop and guess what happens then????

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#3) On October 20, 2009 at 10:51 AM, bigcat1969 (89.11) wrote:

Dang I thought this post was about me! 

I agree with you about both revenue and CAT.  I think next quarter revenues are key because we were already in the depression for Q4 of last year, so there are no excuses not to beat already depressed revenues over Christmas.  Catapiggle has always struck me as a strong, forward looking company.  I used to know a designer type who works for them and I know he felt that it was a great place to work and rewarded its employees well.

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#4) On October 20, 2009 at 11:29 AM, davejh23 (< 20) wrote:

bigcat - I agree.  We're getting to a point where YoY revenue declines look VERY bad.  Year end sales were weak last year, so continued revenue declines (even moderate declines) show significant weakness.  Some companies are still reporting huge revenue declines, but some have reported moderate revenue growth.  If Q4 and Q1 revenues/earnings don't improve significantly (10%+...like CAT's guidance), the market could see a significant pullback...or at least a prolonged stall.

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#5) On October 20, 2009 at 11:33 AM, davejh23 (< 20) wrote:

"Also, I noticed that CAT didn't really "raise their profit forecasts", but instead tightened them.  They raised the lower bound, but cut the highest estimate bound from $1.50 to $1.30."

I've seen many companies do this recently...some even lower the lower bound and increase the upper...widening the profit forecast, providing opportunity for weaker earnings to meet profit forecasts.

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#6) On October 20, 2009 at 12:14 PM, ikkyu2 (99.10) wrote:

Deej, I would chisel your first paragraph into stone as a warning to others.  Well stated.

That said, I understand that Jim Owens is paid for seeing ahead further and better than the rest of us mere mortals.  But his commentary lately has consistently been hyperbolic and well in excess of what his colleagues in the basic materials, housing and construction, and finance sectors have been saying.

CAT always executes really well - that's been true for a long time - but I am concerned that Mr Owens is simply wrong at the margin on this one.  A lot of chief executives have been wrong, some spectacularly, in the last 3 years, wouldn't you say? 

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#7) On October 21, 2009 at 4:29 AM, fmahnke (88.18) wrote:

I'm looking for a good entry point to short CAT common.

I just dont beleive Owens.He is calling for over 30 percent more US housing starts than other economists  Additionally, these guys are expensive and I beleive could be losing offshore mkt share 

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