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Caterpillar Earnings Beat: The Difference Between Presentation And Fact

20 October 2009 No Comment

While driving to work this morning, I was listening to CNBC through my satellite radio and the constant message was how great the Caterpillar (CAT) earnings beat was.  Analysts expected $.06 profit per share, and Caterpillar announced $.62 profit per share.  What a beat!

When I arrived at work, I logged onto my workstation and pulled up Yahoo! Finance like I typically do.  One of the feature articles was about the Caterpillar earnings report.  What caught me by surprise was that the headline said “Caterpillar 3Q profit drops 53 percent on weaker sales”.  I was confused.  Wasn’t the Caterpillar earnings a huge achievement?  Maybe not so much.

Earnings Beats

The reality is that the mainstream financial media is very much so a cheerleader for the equity markets.  The facts remain that just about all companies are reporting drastically lower profit numbers (except Apple) and huge earnings beats at the same time.

The reason that companies are beating earnings is because they are beating the earnings estimates made by analysts.  Most likely this tells you more about the analysts than it does the company.  Nevertheless, beating estimates is a good thing, but investors need to be careful in not taking a news anchor’s emotional response as a clear buy signal.

Caterpillar & The Economy

By taking a closer look at Caterpillar’s numbers, we can get a glimpse into the global economy.  The Yahoo article linked to above has a good statement that provides a clear overview of Caterpillar’s situation:

Despite cost-cutting and price hikes, the company said profits fell 53 percent in its latest quarter. The company failed to overcome a sharp decline in sales as dealers continue to supply customers by chipping away at stockpiles rather than placing new orders.

Caterpillar’s sales slipped 44%.  That’s a huge decrease in business volume and a clear sign of how deep a recession in which the global economy still finds itself.

Caterpillar also raised guidance (which on the surface is always very positive), but realize that it raised the revenue outlook to 10-25% growth in 2010 when compared to the midpoint in 2009.  Now, this is great, but remember, that sales numbers are severely depressed right now so even with 25% growth, Caterpillar is still far below its sales numbers from previous years.

Again, I believe there are signs of improvement in the global economy, but we’re not going back to previous levels that were unsustainable.  So, the question the becomes are stocks pricing in too robust of a recovery?  In my opinion, they are, but only time will tell.

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