Stocks Down as Caterpillar's Earnings Are Hit by Accounting Misconduct


Although stocks started the day higher, they have since fallen into negative territory, as investors and traders digest a series of conflicting economics reports and earnings releases. At roughly halfway through the trading day, the Dow Jones Industrial Average is off by 3 points, or 0.03%.

Economic figures
Pending home sales declined in December compared to November but have remained above prior-year levels for 20 consecutive months now, according to the National Association of Realtors. The NAR's Pending Home Sales Index came in at 101.7 last month. This was a 4.3% decline from November's reading of 106.3 but a 6.9% rise over December 2011.

While this figure appears discouraging at first, given optimism around the still-nascent housing recovery, the good news is that the decline was due to a lack of supply rather than of demand. As NAR's chief economist, Lawrence Yun, put it: "Supplies of homes costing less than $100,000 are tight in much of the country, especially in the West, so first-time buyers have fewer options."

In addition, data from the Commerce Department (link opens PDF file) showed that orders for durable goods -- things like cars, refrigerators, and factory equipment with a useful life greater than one year -- were up 4.6% last month compared to November. The main driver of the increase was non-defense aircraft orders, which were up 10.1% on a sequential basis.

Earnings releases
Beyond these economic releases, the biggest influence on the markets lately has been earnings season.

Shares of Caterpillar are leading the Dow today, up more than 1% in intraday trading, after the heavy-equipment maker reported earnings for the fourth quarter of last year. For the three months ended Dec. 31, the company earned a profit of $697 million, or $1.04 per share, down from $1.55 billion, or $2.32 per share, in the year-ago period.

The decline was largely due to a $580 million, or $0.87 per share, writedown related to accounting misconduct that Caterpillar uncovered at a recently acquired subsidiary. Excluding this charge, the company's earnings per share comfortably exceeded the $1.69 consensus estimate.

According to the company's chairman and chief executive officer, Doug Oberhelman: "From an operational standpoint, 2012 was a very successful year with record sales and profit in a tough economic climate. Considering the weak economy in the United States, along with much of Europe in recession and China slowing, we had a solid year."

Going forward, Caterpillar's guidance was muted. Its outlook for the current year is for revenue of $60 billion to $68 billion and EPS of $7 to $9. Analysts polled by Thomson Reuters had most recently forecasted EPS of $8.54 on total revenue of $65.12 billion.

A number of blue chip companies are set to report later on this week. Among others, Ford announces earnings tomorrow before the bell. For the quarter, analysts are expecting EPS of $0.25. As my colleague Dan Caplinger recently noted, shares in the automaker have soared more than 30% since late October. However, a big focus will be on how the company's performing overseas -- and in Europe and China specifically.

Aerospace company Boeing is set to report on Wednesday. The company has recently run into problems with its newest commercial aircraft, the 787 Dreamliner, being grounded by regulators around the world due to mechanical issues. Analysts are expecting the company to earn $1.19 per share for the final quarter of 2012.

Finally, both of the oil majors on the Dow are set to release their results on Friday. The consensus estimate for ExxonMobil currently sits at $1.99 per share while Chevron's is at $3.07 per share. For both companies, analysts will be watching margins in crude refining and figures related to output and margins from exploration.

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