Caterpillar Beat Outweighs Year-Over-Year Decline

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

Caterpillar's (CAT - commentary - Trade Now) adjusted earnings of 72 cents a share (after 12 cents a share of redundancy costs) beat estimates by about 50 cents a share on $8 billion of sales. That more than outweighs the fact that Caterpillar's earnings are actually down from last year's by more than half. Street analysts raised their recommendations ahead of the earnings report, which caused a price pop shortly before the release.

Caterpillar is not really flirting with its breakeven point, as we had earlier feared. Still, its current earnings power is more like $2.00 a share vs. its historical $5.00 a share. Company guidance is for about $35 billion of sales and $1.50 to $2.00 of recurring EPS in 2009, although results could easily fall outside this range. The company expects to maintain its dividend and eventually buy back its stock, which it sees as undervalued for the longer term. We would agree in part: There is value but also volatility here.

Volumes are down in most parts of the world. The exceptions are China, Japan, Brazil, and parts of Middle East. That's not enough to carry Caterpillar but enough to break its fall. There was also some help abroad from currency, especially the Japanese yen.

Stateside, the machinery and engineering sales operations benefited from being fully integrated, with related services businesses along the whole food chain. This means that the company got repair and consulting business to partly offset sluggish sales of new equipment.

CAT Financial is holding up as well. There has been a receivables drawdown, freeing up cash. The decline in credit quality has been minimal, and the allowance for bad debts has risen only 5 basis points, from 1.50% to 1.55%. Profitability, though down year over year, is quite good given the circumstances and above the first quarter.

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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, a book for times of economic uncertainty. Au appreciates your feedback; click here to send him an email.