Thursday, October 21, 2010

Caterpillar (CAT) Scores with Now Redundant Playbook - Slashed Domestic Labor + Emerging Market Growth = Mad Money

While most speculators are focused on the Apple (AAPL), Netflix (NFLX), cloud computing (September flavor of the week) rare earth metal (October flavor of the week) economy, there is a scandalous amount of profits being created in U.S. multinational industrials as emerging markets offer mad money.  Caterpillar (CAT) is the latest from this sector to report and pretty much status quo - weak currency, explosive growth in emerging esp. Asian, cost cutting over the past few years in U.S. creating a potent mix.   CAT benefits especially from a multitude of global government's spending like banshees on "shovel ready" projects... or in China's case, "build it and they will come" projects.   The only 'negative' is an increase in hiring which will be a drag to profits in the future - thankfully much of it is part time, so those hired in the U.S. can be sent back to the unemployment lines very quickly next cycle downturn.

Technically, after a big move (this is a $50B market cap) from $64 to $80 in three weeks, the stock has been basing for almost an entire month in the $78-$81 range.  For this market move to continue, stocks like CAT (which is the 4th highest weight in the Dow) need to start a new leg up.  A burst to $82+ that is held at end of day would be a positive sign.  Premarket, we see low $81s.

It certainly is not a cheap stock up here - even on the raised upper end of guidance, it is forward 20x estimates but in a world where central banks are handing out fiat money like it is going out of style... x amount of stock certificates chased by an exponential amount (y) of fiat money = higher prices (z) - all other things held constant.  Now we have to wonder if Bernanke can create NASDAQ 1999 across the entire market in 2011-2012 i.e. paying 30-40x forward earnings for industrials circa QE5.  Why just keep it focused on tech stocks when we can inflate everything this time around?  It ended so well 10 years ago.....


  • Caterpillar, a bellwether for the construction and housing industry industry as well as the broader economy, reported quarterly earnings that easily beat analyst estimates, and raised guidance for the full year.  
  • The Dow component posted a third-quarter profit of $792 million, nearly double from the same period last year, equating to $1.22 a share. Sales and revenue gained 53 percent over the previous year, rising to $11.34 billion. 
  • Caterpillar (CAT) also slightly raised its full-year outlook range for sales and revenue, from $39 billion to $42 billion to $41 billion to $42 billion. The new profit outlook is $3.80 to $4 a share, considerably higher than the previous range of $3.15 to $3.85 a share.

Wait for it.... 
  • The company attributed its growth to cost-cutting and increased development in emerging market countries, which suffered in 2009.  (I can almost write these earning reports myself nowadays - they have become carbon copies
  • "Third-quarter results continue to demonstrate our focus on aggressively managing costs and improving cash flow, while continuing to ramp up production to meet customer demand," Caterpillar CEO Doug Oberhelman said in a statement. "Continuing economic growth in the developing world has been key to improving sales."
  • While we are expecting positive economic growth in the United States, the recovery is weaker than we've seen historically, particularly given the depth of the 2009 recession.
  • Sales and revenues grew $3.84 billion from the previous year, held back a bit by a currency impact of $107 million. Profit gained $388 million, which the company attributed to higher sales volume, favorable price realization and improved manufacturing costs.
  • Caterpillar also provided some good news on the employment front: The company said it increased its workforce by more than 15,000, including 6,000 fulltime hires.

[going back to yesterday's piece on "just in time" labor - that is 9000 temp workers, and 6000 full time; notice the mix.  This is a global figure, not domestic, of course.]

Via Bloomberg:
  • Chief Executive Officer Doug Oberhelman, 57, has announced plans in the past five months to build factories in Brazil and China, where economic growth is outpacing the U.S.
  • “The broad global infrastructure build-out is driving the needs for a lot of mining commodities, which helps pull through Caterpillar equipment,” Jeff Windau, an analyst for Edward Jones & Co. in St. Louis, who has a “buy” recommendation on the stock, said before the earnings were published. “A lot of the infrastructure demand is coming from the emerging markets in Asia and that is pulling commodity demand from Latin America and Australia.”

(full report here)

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