A Look at Caterpillar's Blowout Quarter

The Secular Trends Portfolio gobbled up a few more scraps of alpha Tuesday as largest holding Caterpillar (CAT) breezed past consensus estimates for $.22 per share in Q2. Net profit (that’s right folks, net) came in at $.60/sh, or $371 million. Ex-out the one-time restructuring costs and Caterpillar posted $.72, so it appears that the first quarter of 2009 will be the only one with a net loss. Considering the company’s leverage to early-business cycle activity, that’s an astounding feat. CAT shares are the destination of choice should they toss up a great quarter:

They [CAT] have footprints in many businesses on the leading edge of the business cycle, so their comments tomorrow will very quickly determine if CAT shares will hit new highs for the year (around $42) or stay mired in the mid-30’s as has been their fate thus far. Caterpillar is the second-largest holding in the Secular Trends Portfolio, and barring a meltdown within the CAT Financial division, nothing will change the overweighting of this stock.

Dealer Inventory Drop Leads to Top Line Miss

The top line actually came in slightly below estimates, with $7.98 billion revenue vs $8.36b; CEO Jim Owens said the shortfall here was mainly due to a “significant drop” in inventories at the company’s dealers. Owens noted that $1.5 billion have been drained from dealer inventories so far this year, and the number could reach $3b by year’s end. This is actually good news, as it reduces the burden on the CAT Financial division while building up an expected future revenue stream when inventories become flush again.

CAT Financial Keeps its Head Above Water

As I mentioned Monday, my biggest - and only real - concern for Caterpillar was its financing division, but it appears that Owens was straight with shareholders from the beginning when he saw no outsized risk of a GE Financial-type meltdown. The Cat Financial division posted a $89 million profit after tax in Q2, still down big YoY but more than good enough for these eyes.

Full-Year Guidance Tightened & Raised

Caterpillar raised its full-year earnings guidance to $1.15 - $2.25 from earlier estimates for about an even buck per share. This is quite the wide range, but there’s obviously a lot of income statement leverage lying around the home offices in Peoria these days. Revenue range has been tightened to between $32 - $36b.

I’ll be listening to the CC and diving into the 8-K to get a feel for the geographic mix of sales, effects of currencies, and to listen to Owens’s color on the global landscape; he’s as sharp as any CEO out there, and he’s an economist at heart - my kind of guy.

Disclosure: Author does not hold a personal stake in Caterpillar. CAT shares are held in the Secular Trends Model Portfolio.

Comments

[mr clark:]

what about the $35 billion in debt? the P/E has doubled since last year... rather trade TEX at least i get in at net equity...

Jul 22 10:47 AM

[WhoisJohnGalt:]

Interesting hint that comes out of the 8-K is Caterpillar suffered the biggest losses in the EAME region (great company to derive some pertinent macro treeds):

CIS region sales volume dropped more than 80% (Russia actually increased rates from a year ago). Germany and France showing resistance in housing market with new construction permits dropping 7% and 15%, respectively. Unfortunately, permits for Spain dropped 64%; UK housing orders dropped 38%. Sales for electric power applications decreased 47%. Sales for industrial applications dropped 48%. Sales for petroleum applications slid 14%.

We don't hear much about it with our own problems going on, but the EU really caught the U.S.'s cold.

Jul 22 10:52 AM

[Paul S.:]

A 41% drop in revenue is considered a blowout quarter? Congrats on the cost cutting but please.

Jul 22 11:29 AM

[Moon Kil Woong:]

I generally agree with Ryan barnes' assesment but I must admit I own the stock as a long term hedge to inflation among other things. Exporting agricultural equipment overseas and exposure to rising agriculture commodities prices should inflation rear it's ugly head is just the right type of industry for my needs. I'm not sure about you.

Concern over it's loans to it's customes is always good to keep an eye on and is my only real concern regarding this stock. If anyone gets a solid negative indicator or analysis on this front please do let us know.

Jul 22 11:30 AM

[Living4Divi...:]

As they say:

"If it aint a CAT .... it's a dog !!"

Jul 22 11:33 AM

[Ryan Barnes:]

mr clark - yes, the P/E has certainly risen in the past year, but this is an industry-wide if not sector-wide phenomenon. Terex may end up being fine, but I'd be more worried about their cash flows. TEX hasn't been operating cash flow positive for over a year now, and that will inevitably lead to further balance sheet erosion.

For all of its issues (and they are plentiful), Caterpillar has remained operating cash flow positive, which provides support for the balance sheet. Also keep in mind that the majority of CAT's debt is from their financing division, so the numbers look a bit outsized relative to the other metrics.

Best of luck in your investing efforts

Jul 22 11:39 AM

[frosty:]

Report after report says, ". . . beat estimates" rather than "the anlaysts were wrong again". How people (like this one) can make lemonade out of lemon rinds is beyond me. Company after company reports sharply lower revenue, most are showing losses or at least significantly reduced earnings, the BEST they can say is that sales have hit bottom rather than sales will increase, what earnings most companies have are largely from accounting and tax benefits rather than product sales, yet Catapiller has a "blockbuster quarter"? Go figure. This is a stock I will own, but not at today's price or at this "not as bad as expected" point in the "recovery".

Jul 22 03:29 PM

[The Aft Deck:]

It was a difficult quarter to make money in, I think CAT did a great job and will continue to do so.

Jul 22 03:59 PM

[babajay:]

"while building up an expected future revenue stream when inventories become flush again"
Pray tell sir...! When will that be..? I have looked at my crystal ball, and it is a little murky. Early Cycle... Is that what we use to describe a stock that guides 1.25 to 2.25 with 75 cents of 1X charges embedded in there..? This is exactly why the country is in the shape its in. Almost 1 dollar of 1X charges so far this year (and who knows what else) and everyone celebrates by propelling the stock higher...! I will wait for the inevitable meltdown when "expected future revenue stream" doesnt pan out, and I will pray that this sucker is still up here or higher. Luckily there is no borrow issue with this thing (unless the SEC rides to the rescue).

Jul 22 07:10 PM

[icandoitdon:]

not a mention of CAT's effective tax rate for the quarter...which was all of 10%. just another overpriced stock as far as i'm concerned.

Jul 22 09:25 PM

[Ryan Barnes:]

icandoit...Yes, the effective tax rate was 10% during the quarter. It was due to the fact that CAT had operating losses in countries with higher tax rates (like US) and profits in countries with lower ones.

This kind of thing happens all the time at multinationals. Forgive me for leaving it out, but there's only so much space in these articles...I can't break apart every single line and footnote of the income statement & balance sheet.

Although I must admit I'm quite impressed with the fact that you made an entire valuation assessment with one single sentence (fragment). "Just another overpriced stock as far as I'm concerned....."

I bid you good luck in your investing efforts; I have a feeling by the end of this year folks like you will realize that many valuations were the best we've seen in over a decade.

Jul 25 08:40 PM