How Much Can We Trust Caterpillar's Guidance?

| About: Caterpillar Inc. (CAT)

I love conference calls. You get so much information to sift through. Some of it's accurate. Some, not so much. As far as I'm concerned, the yearly guidance falls into the near useless category, particularly when it comes to cyclical companies. Yet, at the end of their fiscal years, cyclical companies usually give their outlook for the upcoming year. Analysts and investors take careful note of the outlook. I'd suggest taking the forecasts with a heaping tablespoon of salt. Yearly forecasts rarely prove accurate.

Caterpillar (NYSE:CAT) is a good example. The construction and mining equipment maker just announced its 2013 outlook. It gave an unusually wide $7.00 to $9.00 range for 2013 earnings. Usually the industrial sticks its neck out and forecasts a precise EPS number or a 45 to 50 cent range.

During the earnings call Caterpillar explained the reason for the two dollar spread:

We do see some positive news as we've mentioned in our release. North America is getting stronger. At CAT Financial, we've finished the fourth quarter strong with retail financing up and frankly past dues at the lowest level they've been since 2007. But if you look at the last two years, we've been in this path with good momentum in the first half of the year, fiscal cliff issues, debt ceiling issues, election issues, China is slowing down and so in our industry we're prepared for both sides and that's why we have a wide range.

That's wise. CAT is smart to hedge its forecast. Take a look at how useful the company's outlook has been in previous years and you'll see what I mean.

Caterpillar's crystal ball hasn't been good in the forecast department. Its guidance was off by a country mile for 2009, 2010, and 2011. Caterpillar missed its 2009 estimate by 43%. The next year the company topped its forecast by 66%. For the last 4 years, Caterpillar's guidance has been useless. Its outlook hasn't panned out since 2008.

Forecasting a year's worth of earnings is nigh impossible. Caterpillar hasn't been giving accurate investors an accurate vision of the upcoming year. Will this year will be different?

Burned again and again, the financial guys in Peoria seem to be wising up. It's hard to miss with a two dollar range... Or is it?

Investors shouldn't put their faith in year forecasts.

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