Street Skins the CAT on Uncertain Outlook

For Dvorchak's preview heading into the Caterpillar conference call, please click here.

They are squashing Caterpillar (CAT - commentary - Cramer's Take) after a report that was essentially benign yet could not dispel the uncertainty surrounding the industrial outlook for 2009.

Caterpillar missed the Street by a couple of pennies, reporting $1.39 of EPS vs. the $1.41 consensus. Sales missed, too, coming in at $12.15 billion vs. the Street's $12.43 billion. Management maintained guidance for the remainder of the year, which translated to $1.43 EPS for the fourth quarter, but given the substantial lead times and backlog in the business, it is not surprising that recent developments aren't denting the order book for fourth quarter. In fact, management noted that machine orders were up slightly in September!

The issue is whether 2009 declines, and at this point management was unwilling to say more than "flat" with 2008, but the company also qualified the discussion by reserving the right to give more formal estimates in January. Flat sales might seem optimistic, but management noted that this bottoms-up estimate incorporates recent meaningful cuts in expected activity. The company also noted positive general factors, such as huge backlogs in mining and energy machinery and the fact that developing economy demand is now greater than developed economies. Caterpillar purposefully built below demand for years in these segments, creating a three-year backlog that can temper any slowdown in capital expenses.

Machinery sales grew 13% year over year, driven mostly by developing economies. Pricing realization was good, and currency effects were positive. Dealer inventories are higher but are in line with sales rates in North America and are reflective of growing sales in international markets. North America and Europe declined, with the rest of the world showing surging growth. Margins were down significantly, since the company could not raise prices as quickly as material costs were surging. Management expects this situation to reverse in the coming quarters, as the company plays catch-up in pricing in this segment.

---

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

Gary Dvorchak is a managing partner of Aviance Capital Management, a Sarasota, Fla.-based institutional asset manager that manages $200 million in growth and value equities and fixed income. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.