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Caterpillar Crushes Estimates, Raises EPS Guidance for 2009 (CAT)

Posted on | July 21, 2009 Time: 6:34 am |

The Secular Trends Portfolio looks to gobble up a few more scraps of alpha today as largest holding Caterpillar (NYSE: CAT) breezed past consensus estimates for $.22 per share in Q2. Net profit (that’s right folks, net) came in at $.60/sh, or $371 million. Ex-out the one-time restructuring costs and Caterpillar posted $.72, so it appears that the first quarter of 2009 will be the only one with a net loss. Considering the company’s leverage to early-business cycle activity, that’s an astounding feat. CAT shares are up over 12% in pre-market trading, and headed right into the range I identified yesterday as the destination of choice should they toss up a great quarter:

They (CAT) have footprints in many businesses on the leading edge of the business cycle, so their comments tomorrow will very quickly determine if CAT shares will hit new highs for the year (around $42) or stay mired in the mid-30’s as has been their fate thus far. Caterpillar is the second-largest holding in the Secular Trends Portfolio, and barring a meltdown within the CAT Financial division, nothing will change the overweighting of this stock.

Dealer Inventory Drop Leads to Top Line Miss

The top line actually came in slightly below estimates, with $7.98 billion revenue vs $8.36b; CEO Jim Owens said the shortfall here was mainly due to a “significant drop” in inventories at the company’s dealers. Owens noted that $1.5 billion have been drained from dealer inventories so far this year, and the number could reach $3b by year’s end. This is actually good news, as it reduces the burden on the Cat Financial division while building up an expected future revenue stream when inventories become flush again.

CAT Financial Keeps its Head Above Water

As I mentioned yesterday, my biggest - and only real - concern for Caterpillar was its financing division, but it appears that Owens was straight with shareholders from the beginning when he saw no outsized risk of a GE Financial-type meltdown. The Cat Financial division posted a $89 million profit after tax in Q2, still down big YoY but more than good enough for these eyes.

Full-Year Guidance Tightened & Raised

Caterpillar raised its full-year earnings guidance to $1.15 - $2.25 from earlier estimates for about an even buck per share. This is quite the wide range, but there’s obviously a lot of income statement leverage lying around the home offices in Peoria these days. Revenue range has been tightened to between $32 - $36b.

I’ll be listening to the CC and diving into the 8-K later today to get a feel for the geographic mix of sales, effects of currencies, and to listen to Owens’s color on the global landscape; he’s as sharp as any CEO out there, and he’s an economist at heart - my kind of guy.

Ryan Barnes

disclosure: author does not hold a personal stake in Caterpillar. CAT shares are held in the Secular Trends Model Portfolio.

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Category: Industrials, Secular Trends Portfolio
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