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Archive for the ‘Infrastructure’ tag

CNH shares getting blasted on poor outlook

CNH — the merged construction/agricultural equipment giant perhaps better known as Case New Holland — disappointed the markets with its earnings outlook today. At one point shares were down 30 percent. Notably, CNH would not offer guidance for this quarter. Wall Street hates that.

CNH said it expected the weakness in construction equipment sales that dogged the industry in 2008 to continue into 2009 in all major markets, including “significant declines in Western European and Latin American markets.” It also warned that the many infrastructure investment projects being unveiled around the world to pull local economies out of recession would do little to increase demand for new equipment.

“Although unprecedented levels of governmental stimulus actions are being enacted throughout the world, we expect that such actions will have an impact in late 2009 or possibly into 2010, and may only serve as an offset to new declines in other construction equipment market segments,” CNH said in a statement.

As a result, the company said it planned to idle its construction equipment factories “for much of the first half of the year.”

Caterpillar, which reports earnings Monday, was down as much as 7 percent this morning.

More on CNH at FinViz.

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Tom Mangan posted at 10:53 am January 22nd, 2009 |

California dozer owners say emissions rules will derail stimulus

Washington Post this morning reports that contractors in the Golden State would just as soon keep their old tractors and not be forced to spend big bucks upgrading them to suit California’s environmental rules.

About $30 billion of Obama’s $825 billion economic stimulus plan is being set aside for highways and bridges. Some of that money would be squandered unless the new president blocks a rule that might keep some earthmovers from doing their economy-lifting work, a group of contractors says.

The Associated General Contractors of America wants Obama to put up a federal barrier to a California clean-air rule that regulates off-road diesel engines already in use. It will require the replacement or retrofitting of the engines of earthmoving equipment. The state has an estimated 180,000 loaders, graders, excavators and other heavy equipment.

“What is the point of stimulus money if it’s used to replace equipment instead of building?” asked Mike Kennedy, general counsel of the Arlington-based group. The regulators “assumed costs could be passed along, but economic circumstances have changed so dramatically that the rule has to be reopened.”

I think about 100,000 Caterpillar employees could answer that question pretty readily.

My guess is the contractors win out on this one, though: I mean, ordering an immediate upgrade on 180,000 diesel engines is a pretty steep request.

The challenge being, the long-run benefits of cleaner-burning engines far outweigh the short-run economic costs. You’ll notice Cat isn’t bewailing clean-rules; it’s building cleaner engines.

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Tom Mangan posted at 11:42 am January 21st, 2009 |

Sector-by-sector breakdown of Democrats’ stimulus plan

Engineering News/Record has perhaps more than you’ll ever need to know about the stimulus plan (considering it’s final form will look like a pancake run through a meat grinder after Congress gets done with it). Lots of digging and scraping happening there, but also:

Native American housing block grants, repairs, rehabilitation, $500 million

Bureau of Indian Affairs, infrastructure (schools, dams, roads, detention and law enforcement facilities) $500 million

Indian Health Service, facilities $550 million

Hmm, do I detect a whiff of Indian casino contributions?

And then there’s

Home weatherization assistance $6.2 billion

National Park Service infrastructure maintenance $1.7 billion

NIH campus modernization, $500 million

I wish my 20 years of observing the wheels of government in motion gave me more confidence that these billions will be spent wisely.

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Tom Mangan posted at 11:03 pm January 20th, 2009 |

Overview of proposed economic stimulus package

Zacks Investment Research offers a detailed overview of the stimulus package introduced last week. It covers the expected “Caterpillar will benefit” angle but also explores a raft of other ways the money will be spent. I liked this part:

Aid to Those Hit Hardest – $106 Billion:

This includes $43 billion for extended unemployment benefits, $39 billion to help those laid off keep their COBRA health benefits, $20 billion to increase food stamps and $4 billion to increase some social security benefits.

These sorts of expenditures are among the ones with the most ‘bang for the buck’ in terms of stimulating the economy. People who are really on the ropes financially are likely to spend the money quickly, which will increase the number of jobs in the economy.

Most econometric studies have found that these sorts of expenditures result in more than $1.50 of economic activity for every $1.00 spent. This is in addition to the obvious humanitarian benefits.

“Humanitarian benefits” rank as “nice to have” but far down on the priority list. Gotta love coverage written for the investor class.

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Tom Mangan posted at 9:22 am January 19th, 2009 |

Caterpillar’s infrastructure prospects, continued

Last week the market told us Caterpillar’s prospects for cashing in on infrastructure investments were overblown. Nevertheless, a lot of people of a more bullish bent think otherwise. A few examples:

  • Forbes: “Stocks like Caterpillar, which makes construction machinery and could benefit from a wave of new federal projects, will bear watching.” (This article offers a nice preview of the week to come, by the way).
  • Taipan Publishing Group: Have you ever seen the movie Brewster’s Millions? It’s a classic 80s comedy in which Richard Pryor, a minor league baseball player, has to blow 30 million dollars in thirty days – without telling anyone why – in order to inherit $300 million more from an eccentric relative. The use-it-or-lose-it provision made me think of Brewster’s Millions… perhaps updated here as Obama’s Trillions. In order to meet the stimulus-driven desires of Washington, the states are going to have to shovel this road-and-bridge cash out the door, pronto. You can almost hear the CEOs of the big construction companies doing a Homer Simpson: Woo-Hoo!” (Nice list of Cat’s companions in the scrum for Obama bucks)
  • TreeHugger: “A lot of this ethos of infrastructure-equals-jobs comes from the 1930s when you put a lot of guys to work digging ditches and shovelling gravel. And we don’t do that any more.” “You can’t just take unemployed people off the street and have them build roads and overpasses,” he said. Much new funding may well wind up being spent on new machinery rather than hiring, he added. “You might as well just send a cheque to Caterpillar in Illinois.” ” (Also at TreeHugger: Meet Ray LaHood, the Congressman from Caterpillar.“)
  • Architectural Record: “As drafted, the plan calls for roughly $550 billion in spending and $275 billion in tax cuts over two years. The plan would have a major impact on construction: By Engineering News-Record’s calculation, about $135 billion of the spending portion of the plan would go toward construction. Additionally, construction firms would benefit from the plan’s tax incentives, which includes an extension of a provision that allows small companies to write off the costs of equipment and other capital purchases in the year those items are purchased.” (Excellent overview of the Democrats’ stimulus package at this link)
  • Fairness obliges me to point out this note about a surge in the volume for Caterpillar put options last week. (Puts are an option to sell a stock at a certain price; they gain value as a stock falls because they theoretically allow a shareholder to sell a stock at an above-market price. Options also are immensely risky because there is always a strong chance of losing your entire bet).

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    Tom Mangan posted at 8:21 pm January 18th, 2009 |

    Infrastructure bubble coming?

    Why wait for the bubble to inflate before predicting it will pop? Perhaps I’m a victim of my Caterpillar tunnel vision, but the relentless flogging of infrastructure stocks these days has me wondering. After all, a huge uptick in infrastructure spending will cause a vast boom that lasts until the spigot of borrowed government money runs out. Then the boom turns to a bust.

    I have to wonder if Cat isn’t a bit bubbly already: A half-decade of consecutive annual increases in sales and profitability — one record quarter after another for years on end — strikes me as an unsustainable uptrend that is bound to be corrected (little voice in my ear says “what part of down from 80 to 40 in the past six months have you failed to detect?”)

    Generally I will try to avoid empty speculation of this ilk, but I thought it would be fun to deflate a bubble that doesn’t even have any air in it yet.

    As long as I’m on the subject, you might enjoy this two-part Seeking Alpha profile of infrastructure-related ETFs. Also: Investopedia profiles Cat and its competitors.

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    Tom Mangan posted at 9:10 am January 12th, 2009 |

    Caterpillar’s infrastructure prospects

    Standard & Poors rates Caterpillar a strong buy because of its potential to sell a lot of tractors as governments around the globe build bridges, roads and such to juice their economies.

    The TV talking heads have been flogging Caterpillar’s prospects since early December, when Barack Obama promised a massive infrastructure spending plan. Those who had the nerve to buy Cat at its October and November bottoms have notched 40 percent gains, including a stunning 11 percent pop on Dec. 8, the Monday after Obama announced his plan. Interestingly, all the hype since Dec. 9 has added a mere 7 percent to Cat’s price (42 and change then to 45 and change today).

    The S&P report at is the first in-depth, seemingly authoritative (packaged subprime mortgages, anyone?) report on Cat I’ve seen since starting this blog. Among the telling tidbits:

    We expect Caterpillar to be a major beneficiary of the global infrastructure boom we see, with an estimated 6.4¢ of every dollar spent on highway construction used toward the purchase or lease of equipment or on major repair and maintenance, according to a recent report from Associated Equipment Distributors, an industry organization. In regard to water infrastructure, 12¢ of every dollar spent on sewer and drinking water projects is for construction equipment, according to Associated Equipment Distributors.

    In the U.S., we believe Caterpillar is extremely well positioned in its chosen infrastructure equipment end markets. The company derived $17 billion (38%) of its 2007 revenues in the U.S. The National Governors Assn. estimated there are more than $136 billion of infrastructure projects ready to break ground.

    Mind you that 6.4/12 percent will be divided among Cat and all its competitors, but as the No. 1 company in the sector, Cat should draw the lion’s share. Cat’s financial arm looks strong, too:

    We believe Caterpillar Financial’s ability to access nearly frozen credit markets was evident in September 2008 at the height of the credit crunch, when it easily raised more than $1.3 billion in funding, allowing it to continue to provide funding options to its customers.

    You need to read the whole thing to get to the part where it warns of substantial risk from reversals in the markets and national economies. But that’s true of all stocks. I can say from my own experience that Caterpillar has traded between the 30s and 60s as long as I can remember, so from a long-haul perspective a price in the mid-40s with a 4 percent dividend yield seems reasonable (though if you base your buys on blogger recommendations, you get what you pay for).

    MarketWatch on infrastructure ETFs

    John Spence at MarketWatch profiles a batch of exchange-traded funds that stand to gain from infrastructure spending. EFTs protect you from individual-stock risk, but you really need to know where the money in these funds is invested:

    Choosing an infrastructure ETF presents its own challenges, though. For one, McCall and others say some infrastructure funds are too heavily invested in utility stocks, which many analysts believe aren’t poised to gain as much from infrastructure spending as other sectors, like construction and engineering.

    He points to the PowerShares Dynamic Building & Construction Portfolio, which invests only in U.S. stocks and has just under 5 percent invested in Cat, for instance.

    Motley Fool on jumping into China

    Tim Hanson at Motley Fool notes that the collapse of China’s stock market bubble in the last year has not crushed the prospects of investing there. China’s government also has a massive infrastructure plan in the works.

    So, while the China market is coming to terms with reality, there are individual companies that will continue to profit from this enormous economic growth engine. Remember: No matter what its relatively immature domestic stock market says, the opportunities in China are huge. If they weren’t, companies such as Yum! Brands, Caterpillar (NYSE: CAT), and many others wouldn’t be investing so heavily in the country. According to the U.S. Chamber of Commerce, sales by American companies in China topped $75 billion in 2004.

    The report ends with the usual deeply annoying pitch to buy one of MF’s tip sheets, but the info at the top is worth a look.

    Cramer’s latest

    Finally, world champion TV talking head Jim Cramer has a point:

    I believe the stock will get gigantic orders from the U.S. government after the passing of a stimulus plan. You can’t build any infrastructure without Caterpillar’s equipment, and the government ain’t buying tractors from Komatsu. Helped by its 4% yield, the stock will go back to $55, a fantastic move, even though first-quarter earnings will be horrible. Don’t forget, China’s coming back, and that’s a second big customer.

    As always, remember what a pain in the ass it was to earn your money before you decide which soulless global corporation deserves a slice of it. Also: we’re in a bear market, which means a 30 percent blast to the downside could come out of anywhere at any time. Caution is your friend.

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    Tom Mangan posted at 8:47 am January 6th, 2009 |

    The *other* infrastructure play

    RealMoney contributor Robert Loest says the debt-fueled economic expansion of the U.S. consumer sector has about had it. He contends the developing world will be a major source of growth in coming years and that large multinationals like Caterpillar are best poised to exploit those opportunities because they have such a huge head start at doing things like building factories, developing markets and dealing with political complexity around the globe.

    Investors may want to consider replacing many of their iconic consumer companies with global industrials with good, relatively secure dividends such as Caterpillar, Rockwell International , Emerson Electric , ABB Limited and similar companies, unless their consumer stocks are really undervalued and pay a hefty, secure dividend

    You’ll have to forgive the author for using buzzwords like “paradigm shift” and “event horizon.” Some can’t help themselves.

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    Tom Mangan posted at 1:08 pm December 26th, 2008 |