Caterpillar Easily Surpasses Earnings Estimates

The stock market is pointed higher on Tuesday morning in large part because of five Dow components reporting earnings that have beaten expectations. The Coca-Cola Company (NYSE:KO), E.I. du Pont de Nemours & Company (NYSE:DD), Caterpillar (NYSE:CAT), United Technologies (NYSE:UTX), and Merck & Co. (NYSE:MRK) all reported earnings today and each of these stocks are bellwethers in their respective industries. Easily the most impressive of these profit reports was Caterpillar who absolutely destroyed analysts estimates of $.22 per share reporting $.60 per share. To demonstrate just how gloomy the estimates were, the results represents a decline of 67% in net income and revenues slid 41% in the quarter to $7.98 billion. In fact, even though earnings were far better than anticipated, revenue fell well short of expectations for sales of $8.86 billion.

How does a company see its top line drop by 41% and then beat profit expectations by 272%? There are two reasons, first Caterpillar has aggressively cut costs in 1H09. They have slowed production and worked to reduce existing inventory, and they have dramatically reduced employment. The company that had about 113,000 employees at the end of 2008 has planned to reduce headcount by about 20%. In this very challenging and uncertain environment with revenue streams drying up, the company knew that it must get leaner in order to navigate this recession.

The second reason for the huge earnings beat was that analysts were simply too bearish, and according to Yahoo! finance the consensus EPS estimates 3 months ago were 45% higher than they were coming into the release. This wave of bearish sentiment seems to coincide with a general improvement in the global economy. This is likely because in April the company reported its first loss in 17 years citing slumping sales and charges related to headcount reductions. The company also lowered guidance for the full year at that time. When the one time charges were stripped out, CAT did much better than estimated, but the loss sent analysts sentiment reeling in the face of an uncertain future.

The stock has bounced up as much as 12% in morning trading because of the much better results. We continue to rate this stock as Undervalued because on a price-to-cash earnings and price-to-sales basis the stock compares favorably to where it has been valued in the past, including the declining fundamentals. The results were accompanied by a lift to guidance saying that there is still a great deal of uncertainty and raised full year profit guidance to about $1.25 per share. After today’s advance the stock is trading at over 30 times guided earnings for 2009, which is not particularly appealing. However, there are comments from the company that are optimistic towards the second half and beyond. The company, being the largest producer of construction and mining equipment, is a bellwether for the global economy. So, we have attached some key portions of their global outlook for the rest of the year.

  • One key component to the outlook is global stimulus efforts. Caterpillar estimates that governments around the world have allocated $4 trillion in stimulus spending with about $1.8 trillion of that dedicated to infrastructure spending. There exists the possibility that more spending programs have yet to be announced. Clearly, Caterpillar would be a primary benefactor of this money.
  • Economic activity has slowed in the first half, but that decline appears to have moderated.
  • Growth from developing countries has outpaced growth in the developed world thus far in the cycle. China in particular has started to grow through eased monetary policy and spending on infrastructure.
  • Caterpillar expects the global economy to shrink by 1.3% in 2009, with developed countries slightly worse than the mean declining 1.5%.

Caterpillar Blows Out Earnings Through Lower Costs

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