CAT Preview: Hanging in There?

Despite Caterpillar's (CAT - commentary - Cramer's Take) reputation for cyclicality, the stock has held up better than most in the recent market retreat. That's probably because there are fewer clouds over this company than most.

Consensus is for 2008 earnings of $6.00 to $6.05 a share on $48 billion of sales, both of which would represent a high single-digit improvement over 2007 totals. The company is expected to earn about $1.52 a share on $12 billion of sales for the quarter just ended.

Like many other U.S. companies, Caterpillar has suffered from the weakness of the U.S. housing market. Moreover, sales to domestic transportation end markets have also started going in reverse. Things aren't all bad stateside, however. Spending by local utilities as well as state and federal infrastructure projects have prevented U.S. results from tanking.

Unlike some U.S. companies, Caterpillar has an ace in the hole in terms of foreign sales, which represent just half of the total. Key customers here are in Brazil, Russia, India and China. Because its agricultural equipment represents a major part of the solution, Caterpillar's stock price (and earnings) have benefited recently from the rapidly growing demand for food in these countries, which has also lifted the prices of food and fertilizer shares. Other potential areas for rising profit are infrastructure and oilfield services.

On the conference call, I would be listening for the mix of U.S. vs. foreign sales, as well as for the internal mix of stateside sales. U.S. sales do carry higher margins, if for no other reason than that shipping costs are lower, while foreign markets are growing much faster, being less mature. In any event, future results depend on a good mix of blended sales and blended margins. Cost-cutting and financial management measures (debt, equity, or working capital reduction) could also help.

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At the time of publication, Au had no positions in the stocks mentioned, although holdings can change at any time.

Thomas P. Au, CFA, is a principal with R. W. Wentworth, a financial services firm in New York City. Earlier he was an emerging markets portfolio manager for the investment arm of Cigna Corp. and an analyst with Unifund, S.A. of Switzerland and Value Line. He graduated cum laude with a B.A. in Economics and History from Yale University and an M.B.A. in Finance from New York University. Au is the author of A Modern Approach to Graham and Dodd Investing. Au appreciates your feedback; click here to send him an email.