CAT in the Dog House
By
Chris Rugaber (TMF RFK)
January 21, 2000
Investors in Caterpillar, Inc. (NYSE: CAT), the construction, heavy equipment and engine manufacturer, were greeted with another underwhelming earnings release this morning, as the company announced that 1999 fourth quarter earnings dropped 21% from the year-earlier period. The company also warned that earnings for 2000 would come in below current estimates.
Revenue slumped 7.2%, from $5.41 billion to $5.02 billion, and earnings per share fell from $0.83 to $0.67 year-over-year. Full-year 1999 revenue declined by 6% to $19.7 billion, and EPS for 1999 fell 36% lower, to $2.63. Since the company issued earnings warnings in July and November, today's news wasn't completely unexpected and only took a small bite out of the stock, which was down $11/16 in morning trading. The company's earnings warning in November did the real damage, causing a 12% tumble.
The reasons provided by the company for the downturn in earnings aren't surprising to those who've followed Caterpillar in recent years: lower machine sales, the stronger dollar reducing income from international sales, low commodity prices, and ailing economies in various parts of the world. Caterpillar's agricultural and mining machinery revenues are somewhat dependent on commodity prices in those sectors, which have remained low for most of this year. In 1999, sales improved in Asia, according to the company's earnings release, as retail demand improved, but "fell sharply" in Latin America due to "recessions in a number of countries."
Many Fools own "Cat" as part of their Foolish Four portfolios, and those who first purchased it in January 1999 have had an interesting ride, as Ethan Haskell noted in Wednesday's Foolish Four report. The company's stock zoomed upwards over 40% early last year, based on solid first-quarter earnings, which prompted a flurry of posts to the Foolish Four message board about whether investors should forget the Foolish Four strategy's one-year holding period and just take the money and run. Those who did may have felt smug when the stock subsequently gave back its gains as the company guided earnings estimates lower. Nevertheless, as Ethan points out, most companies that remain in the Foolish Four for two years in a row, as Cat now has, outperform the S&P 500 in their second year.
It's hard to tell at this point whether Caterpillar will follow that pattern. The world's leading manufacturer of construction equipment trades at about 15x next year's estimated earnings and in many ways is a solid company. It has global market penetration (international sales account for 50% of its business), and a healthy financing division, which actually saw its revenue grow 14% in 1999. Free cash flow for the first nine months of 1999 topped $1.3 billion. On the other hand, the company sports over $10 billion in long-term debt, most of which is in its financing division, and only $283 million cash on hand, as of the company's third quarter filing.
Cat noted in its press release that "company sales are forecast to improve slightly in 2000 due to better worldwide growth, higher commodity prices and less dealer inventory reduction. Profit is expected to increase in line with sales." Given the company's apparent reliance on these unpredictable factors, which are beyond its control, holding Cat in an unemotional portfolio such as the Foolish Four is probably the best way to invest in the company.
