Tuesday, July 21, 2009

Caterpillar +12% on low-quality earnings beat. (CAT)

AlphaNinja - Caterpillar (CAT) is one of the more interesting earnings reports to look at today. I would be surprised to see the stock finish the day at this level ($40.85), as people will sell the news.

They beat earnings, but that's after estimates have dropped like a rock. They reported earnings of 72cents versus expectations of 22cents, but that excludes $85million or 12cents per share of "redundancy costs," or employee severance associated with layoffs. I am happy to exclude one-off charges from company earnings for comparison purposes, but in this case CAT's earnings beat was largely BECAUSE of lower spending, so we'll look at earnings of 60cents. A big beat, but of low quality.

I said "low quality" above because (among other things) CAT missed revenues. They also benefited by $110mil in a LIFO accounting adjustment that added 14cents to earnings, and a lower tax rate (10%) added maybe 12cents to the bottom line.

Conference call starts in less than an hour. Here's a snapshot from the filing detailing revenue and operating profit versus last year:

Below is the entire report - lots of interesting details. CAT is a great exercise in trying to find the "trough" earnings and what multiple to put on them. (No I'm not a Price-Earnings investor but lots out there are). If they trough at $1.50-2.00 in earnings, do you put a 10 PE on it? 15? Well now it's at least a 20 PE, with the stock hovering around $40. Looks rich to me, with the huge debt they carry.


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