Sunday, October 21, 2012

PREVIEWING Caterpillar's Monday Earnings Release and What It May Reveal about the Global Economy

Caterpillar releases its third-quarter earnings results tomorrow morning, but the more important questions asked and answered won't be about the quarter just ended.

Instead they will more likely deal with the general global outlook for economic growth.

Is Caterpillar Filling In, or Digging Out?  previews the company's expected results:

"How would a global recession play in Peoria? The famously typical Illinois town's largest company, Caterpillar figures the impact on it might be, well, typical.

It is more than an idle question after the construction-machinery company's sales slowed sharply last month. Investors can expect plenty of questions on the global economic outlook during Caterpillar's third-quarter earnings call Monday.

Analysts estimate the company will post earnings per share of $2.21 versus $1.71 a year ago . . . . For a cyclical bellwether like Caterpillar, though, investors are more interested in future years.

Last month, Caterpillar told investors how earnings in 2015 might look under various economic scenarios. On that basis, analysts seem to be assuming the most benign one outlined by management: that 2013 turns out a lot like 2012 has been and that 2014 and 2015 see improvement. The company said, under that scenario, earnings per share likely would end up between $12 and $18. Analysts agree, forecasting 2015 earnings of $13.74.

But the market, as usual, may be a step ahead of the forecasters. Caterpillar's stock has lagged behind the Standard & Poor's 500-stock index by 21% this year. That puts Caterpillar at about 14 times the $6 in earnings management predicts for 2015 if sales slide by about 15%. That revenue fall would be worse than the 1990-1991 downturn but less than half as sharp as during the global financial crisis.

That seems reasonable at first glance. But investors might want to hedge against what Caterpillar dubs a "more severe" downturn. Past recessions didn't feature a housing and investment bubble in China that in turn fed an epic boom in metals demand. Construction and mining make up more than 60% of Caterpillar's sales between them, and the company has upped its bet on both China and materials through recent acquisitions like Bucyrus. By Caterpillar's reckoning, a sharp drop in business could cut 2015 earnings per share to just $3.50.

If that comes to pass, a slump in machine sales for the three months ended in September may turn out to be the first warning. Growth slowed to 6% on a rolling three-month basis from 14% in August and 27% in January. Investors have to watch Monday for any signs that Caterpillar has dug itself into a hole."

Summing Up

Stay tuned for what Caterpillar's management has to say Monday about the third-quarter results as well as the outlook for the global economy, including specifically its expectations for business conditions in China.

Thanks. Bob.

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