Caterpillar reports $1.49 EPS, Sees Flat 2009
Posted on | October 21, 2008 Time: 1:41 pm |
Earnings were a few pennies less than expected, but CEO Jim Owens confirmed the earlier target of $6.00 EPS for the full year, and sees “flat” sales results for 2009. As I expected, record sales outside the U.S. continued, while Owens notes that the U.S. and Europe are in “recessionary periods”.
Inside the Numbers
Machinery and Engine sales were both up in the third quarter, 13% and 16% respectively. The Cat Financial division (my biggest scare factor going in) actually did quite well, reporting an 8% rise in sales to $833 million. Some comments on the state of Cat Financial:
“Caterpillar has a strong balance sheet, a solid credit rating and we’ve had access to the capital we need to run our business. That includes our captive finance company, Caterpillar Financial Services Corporation (Cat Financial). We are pleased to report that despite difficult market conditions, Cat Financial has had good access to capital and continues to offer lending options to our customers. It’s a tough environment, but we have a conservative business model which prudently manages risk and a great team that’s executing well at Cat Financial. When the dust settles, I’m confident that our customers and stockholders will be well served by Cat Financial’s long-standing, sound lending practices”
As for total sales, they increased just 3% in the U.S. while growing 20% overseas. This continues the trend towards global diversity, as 60% of sales are now coming from outside the U.S.
Price Mix
Of the roughly $1.3 billion in revenue growth YoY, $833 million came from higher volumes, $385 from higher price realization, and $262 from positive currency effects. Higher steel costs were a drag on earnings, leading to a $60 million profit shortfall from the same period last year. As mentioned in my preview yesterday, the lower commodity prices we’re seeing in steel and fuel will eventually work their way into Cat’s bottom line, but probably not until the fourth quarter or later due to supply chain length.
In a final note on commodity prices, Owens (who is a Ph.D. holder in economics) said that while global commodities could fall further, prices on the whole remain high enough to encourage investment in mining, construction, and energy exploration.
Based on the $6.00 target for ‘08, CAT shares still trade for less than 7x earnings. Investors seem to be expecting a drop to below $4.00 per share in 2009…this doesn’t seem likely considering the confirmed sales target, lower trends in steel & other material costs, and the inherent diversity in some of Cat’s new businesses like railroad parts, logistics, and remanufacturing services. I’m tentatively figuring they can still hit $5.00 - $6.00 next year, which continues to make the stock very attractive at these levels.
Shares are flat in early trading at $40.76
Ryan Barnes
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