Caterpillar: A Good Earnings Report Wasn't Good Enough

Jul.26.11 | About: Caterpillar Inc. (CAT)

“Expectations were getting to high”, according to Longbow Research.

Beyond Caterpillar’s (NYSE:CAT) profits jumping 44%, revenue increased 37%. Sales in North America rose 30%. And the company increased its full-time workforce by 11%.

But that didn’t stop shares from falling on the news. Shares slid 6% ... the biggest decline since April 7, 2009, according to Bloomberg.

And the reason for the sell-off: “The first quarter was just incredibly strong. Caterpillar executed very, very well. The second quarter was a bit more normalized”, according to Morningstar.

Obviously, the market wasn’t looking for normalized … but it looks like last week’s sell-off was a little overdone.

The bottom line: last week’s earnings report marks the first time in 10 quarters that the company’s profit was lower than expectations. The stock was a little too beaten up on the news (and even after that beating it is still the largest gainer in the Dow … up almost 52% over the past year). And while the company saw “some softening of growth” in China, that not necessarily that bad … “a slowdown lets us in the industry all take a breath and make sure we don’t over-capacitize there”, according to CEO Doug Oberhelman. And granted, looking at valuations, shares are not cheap, but the stock is in a positive trend, and has technically been a long-term buy for the past two years.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.