Caterpillar crushes estimates in terrible economy, sees fourth quarter recovery

Caterpillar (CAT), the manufacturer of heavy equipment for industries including mining and agriculture, reported earnings before the market opened today. Earnings for the second quarter of 2009 were $0.60 per share, or $0.72 per share after stripping out one-time charges, compared to the average of $0.22 per share expected from analysts. Revenues were $7.975 billion, compared to the $8.86 billion average expected by analysts.

After rising nearly eight percent yesterday, the stock was up another eight percent in pre-market trading shortly following the announcement.

Caterpillar has faced headwinds as end user demand has plunged amidst the global economic slowdown. The credit crunch has hurt business because many potential purchasers have had trouble financing equipment and projects. According to a Credit Suisse research note issued last week and obtained by DailyFinance, channel checks of Caterpillar dealers indicated that "U.S. markets have bottomed although most dealers believe we could be stuck here for a while." The note went on to say that less optimism exists about the demand picture in Western Europe, although hope remains for a rebound in China, Indonesia, and Brazil in 2010. Dealers are said to be suffering through a 70 percent drop in business since the peak in 2006. Credit Suisse rates Caterpillar shares "Neutral" with a $32 price target.

In a mid-June research note from Morgan Stanley, analysts called into question the market's perception of Caterpillar stock. "We think mid cycle is still years away, and see the valuation as stretched -- very stretched during points where the shares near ~$40. Our estimates remain well below consensus, based on our more negative take on construction, infrastructure, product pricing, and on the economic cycle," analysts said. Morgan Stanley rates Caterpillar "Underweight" with a $28 price target.

One potential area of concern is Caterpillar's finance subsidiary. Like several other manufacturers, Caterpillar expanded its finance arm in recent years to enable buyers to more easily obtain financing. With the latest down cycle in credit, there are concerns that losses could be building up in Caterpillar's loan book, and that any recovery could be hampered by an inability to offer credit to the same degree as in previous years. Independent research firm CreditSights has said that although asset quality could still deteriorate, the reduction in short-term financing eases worries somewhat.

Although write-offs at Caterpillar's finance subsidiary jumped 17 percent from the prior quarter, accounts past due were basically flat. The company also updated its guidance, saying that it expects to earn between $1.15 and $2.25 per share this year, excluding one-time "redundancy costs" related to reducing employee count. The average analyst expected Caterpillar to earn $1.02 per share this year, with a high estimate of $1.66.

Commenting on the results in a press release, CEO Jim Owens said, ""There is still a great deal of economic uncertainty in the world, but we are seeing signs of stabilization that we hope will set the foundation for an eventual recovery." Caterpillar's economic outlook described conditions as "the worst year for growth in the postwar period," but the company said it expects the start of a recovery in the fourth quarter of this year.

James Cullen edits and writes at He has no personal position in the stocks mentioned above.

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