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Assessing Caterpillar’s conference call for Q4/08 earnings

Caterpillar’s earnings call was remarkable in the degree to which the record-breaking sales of last year were utterly irrelevant to the world we live in this year. Cat raced along fine for three quarters, then took a spectacular spill in the fourth. (Think “agony of defeat” ski jumper and remember — he survived).

Caterpillar CEO Jim Owens described a “seismic adjustment” in revenues for 2009. Cat was hoping for $50 billion; now it’ll settle for $36-44B. Caterpillar’s promise to deliver $2.50 a share in earnings — a 50 percent haircut from ’08 — this year drew some skeptical questioning from the analysts, but Owens and company assured them the “redundancy” operations (if they got no work for you, you’re redundant; and unemployed) of the first quarter, combined with reductions in prices for steel, copper and other essentials, should help get costs in line with sales volume.

Speaking of commodities, there’s a lot riding on how much miners can earn digging them out of the ground. Mike DeWalt, director of investor relations, noted that since the end of the third quarter, “copper, which is a bellwether commodity for us, is down about 50%; oil was off about 60%; and natural gas prices were down about a third.”

Owens highlighted the uncertainty that will affect whether Cat earns $2.50 a share: “… we just need to see where the bottom of this cycle is going to end up. It’s difficult to assess. Is oil going to be $30 or $80 at the end of the year? Is copper going to be $0.75 or $2.50 at the end of the year?” Cat expects copper to be in the $1.10 per pound range, which is below the price miners need to launch new projects.

What about inventories?
“We pretty much hit a wall in December,” DeWalt said. Things got bad enough that Cat called up its dealers and asked them to call off any orders that weren’t a sure thing. That means Cat won’t be heading in to the depths of recession with so many parking lots full of tractors nobody wants.

And what about the legendary order backlogs of the mega mining trucks? Owens says the three-year waiting list has helped, but things are pretty ugly across the mining sector. “The volatility in the orders of people slicing about or canceling orders has been very high,” Owens said. The order backlog “still looks reasonably good for this year,” he said, though some orders are likely to be canceled.

Cat’s pitch is that when the mining sector recovers, it’s going to have to do something about the 10-year average age of its fleet. Like, buy a bunch of new trucks, tractors and loaders.

What about cap-ex?
While Caterpillar plans to slash capital expenditures by 40 percent, it’s sticking to its guns about getting the North Little Rock, Arkansas, motor grader plant up and running. Same with the engine plant in Seguin, Texas.

Talking debt
Cat’s debt ratio swelled to 57 percent last year, which triggered some analyst consternation, but Group President Ed Rapp promised to get it back down to its historical range of 35 or so in the next year. Where the excess came from: 11 percent to fund the pension plan; 3 percent to load up on extra cash to ride out the financial crises; and 7 percent to integrate Cat Japan. Subtract those factors and Cat’s back to normal, he says.

Stimulus thoughts:
Mike DeWalt is hoping for “a good thoughtful package” in the United States and China. He added that a number of the emerging markets have relatively low inflation and stronger balance sheets than they’ve ever had heading into a major recession.

“If we just get the financial market to stabilize globally, this economy wants to grow and we, Caterpillar, I think are exceptionally well positioned.”

I’ve skipped some details on Cat Financial that are a bit out of my league. Nothing set off any car alarms, though.

Cat’s stock took a proper pummeling Monday, and there’s more in store, no doubt. Still, the five-years-down-the-road outlook is that when the economy recovers, commodities will again be in short supply and big yellow trucks, tractors and engines will be needed to get them to market. Doesn’t have to be Cat supplying all that machinery, but I suspect most folks who already own Cat equipment will buy more when their current supply wears out.

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Tom Mangan posted at 12:03 am January 27th, 2009 |

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