Wednesday, January 27, 2010

Caterpillar beats earnings estimates, but 2010 outlook is weak (CAT)

CAT posted earnings per share of 41cents for the fourth quarter, handily beating the consensus estimate of 28cents. Revenues came in about $200million below the $8.1billion the Street was looking for.

For 2010, CAT estimates earnings of 2.50 per share, a bit below the Street average estimate of 2.70. Revenue guidance is a range of +10% to +25% versus 2009's $32.4billion - so a midpoint of $38billion versus the street estimate of $36billion. That 10-25% increase in revenue is being scoffed at this morning, part of the reason shares are down 6%.

I'm on the conference call right now, will update this model later today. But here's a quick look at earnings and Free Cash Flow scenarios for CAT over the next few years. I'm generous on gross margin and many other metrics. Management's 2012 call for $60million in revenue, if they actually got there, would probably lead to a double in the stock price. I think the revenue numbers here are wildly optimistic, but I'll share them in a "upside" look:

In q4, CAT was still able to handily cover its interest payments, to the tune of about 7.5times.

Looking at 2009, the numbers show what a massively leveraged company CAT is. They held the line on gross margin well, as it actually increased by 1%. But sales fluctuations can KILL this company, as their largely fixed cost nature (operating costs of $7.9billion vs $8.5billion the previous year) is susceptible to wild fluctuations in sales. :Last year's $12.9billion in Gross Profit easily covered operating expenses, but in 2009 that gross profit dropped by $4.4billion while operating expenses fell only $540million. Dangerous...

Among reasons why the EPS outlook isn't better, the company cites a higher tax rate and an unfavorable product mix (higher % of lower margin sales). From the prepared Q&A:

CAT cites an uptick already in aftermarket service parts and sees this as an indicator of growing demand...but it also must be seen as an indicator of "fix-it versus buy-a-new-one" mentality.

Below is from the company's earnings presentation comparing 2009 operating income to 2008. The red bars show negative drags on operating margin, while the green shows positive impacts. CAT's focus on procurement, manufacturing efficiencies and reductions in headcount could lead to a springboard effect if sales turn around.

I wouldn't touch the shares here. Sure, if management hits the $60billion revenue mark in 2012 they will have proved the naysayers wrong. But a more rational look at earnings possibilities over the next couple years leaves the shares more than fully valued at current levels.

Copyright 2010 AlphaNinja

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