Tuesday, 21 July 2009 01:00

Caterpillar Q2 Results

Caterpillar has released revenue and EPS figures for 2Q09. Although the reported revenues of $7.97 bn is lower than the consensus estimates of $8.86 bn and our even more opitmistic estimates of $9.2 bn, the reported earnings per share of $0.60 per share stands higher than the consensus estimates of 0.22 per share and our (even more optimistic) estimate of $0.29 per share.

The results have beaten the expectations of the Street and our calculations primarily due to better than expected margins which it seems has been achieved through higher than expected (and apparently drastic) cut in workforce as well as a lower tax rate. From Bloomberg.com: "[Caterpillar] has eliminated about 17,100 full-time jobs since December. More than 17,000 contract and temporary workers also were cut." We will be able to ascertain the reasons for margin expansion after analyzing the full results when they become available.

For professional subscribers, if you recall, we had highlighted the sensitivity of the stock's valuation to the change in margin and highlighted it in the forensic report. Higher-than-expected margins have propelled the earnings for the company, though revenue of the company still remain significantly subdued, declining a significant 41% y-on-y in 2Q09. It is my belief, that cost cutting can only go but so far. If they are not able to raise revenues next quarter, a profit surprise is highly unlikely unless they cut imprudently deep into overhead and expenses.

In addition, the company improved the 2009 EPS (including redundancy costs) guidance to a range of $0.40 to $1.5 against the previous guidance of $0.50 per share. We have estimated 2009 EPS (including redundancy costs) at $1.22 per share. As is customary, I try to remain as conservative as prudently possible.

We will deeper into Caterpillar after the company reports the full results and independently identify the causes of variation from an unbiased perspective.

Last modified on Tuesday, 21 July 2009 01:00


  • Comment Link shaunsnoll Tuesday, 21 July 2009 18:13 posted by shaunsnoll

    but inventories moving up and down can move up and down with profits and can often have negative and other times positive correlation. simply reducing inventory does not necessarily mean profits are positively impacted by that. take UTX that reported today, they dramatically reduced inventories in a few of their businesses while at the same time their profits are also imploding, this doesn't get into the fact that inventories will fluctuate on seasonal patterns often depending on the industry/business. you are right about LIFO liquidations, however, reducing inventory will ALWAYS impact cash flow in a positive way but not always impact earnings in either a positive or negative way. i see your point and don't want to get into the trees and miss the forest but just want to make sure one or boombustblog alumni is not confused on accounting issues here.

  • Comment Link Reggie Middleton Tuesday, 21 July 2009 13:10 posted by Reggie Middleton

    Actually, economic reduction of inventory is a positive as long as inventories aren't cut so thin as to inhibit ramping up in a recovery, but there have been many instances of LIFO games that are nothing but accounting shenanigans that may boost share prices in the beginning, but as people in the know find out, may very well hurt the share price. I don't know which will be the case with CAT until they release their quarterly reporting docs, but I just wanted to all to know that games with inventories are a popular shenanigan in the manufacturing and industrial industries.

    According to another reader, "$.17 came from lower tax rate and $.14 from LIFO inventory cleansing".

    If one were to strip those out, it is (coincidentally) right on point with my estimate of $.29.

  • Comment Link shaunsnoll Tuesday, 21 July 2009 12:11 posted by shaunsnoll

    i've looked at IBM recently. that company's management is amazing. what are you interested in?

  • Comment Link shaunsnoll Tuesday, 21 July 2009 12:02 posted by shaunsnoll

    inventory reduction has no direct effect on profits but reducing inventory DOES impact cash flow positively.

  • Comment Link Rumi Tuesday, 21 July 2009 10:49 posted by Rumi

    BTW, has anyone looked at IBM, AAPL, YHOO?

  • Comment Link Rumi Tuesday, 21 July 2009 10:47 posted by Rumi


    "[The second-quarter profit of $371 million was down $735 million from $1.106 billion in the second quarter of 2008.] ...The company reduced inventory in the second quarter by more than $800 million, and through the first half of the year inventory has declined by more than $1.6 billion."

    It looks like *all* their profit came from inventory reduction.

    "Sales and revenues of $7.975 billion were down 41 percent from $13.624 billion in the second quarter 2008. [...]For sales and revenues, the range has been tightened to $32 billion to $36 billion [...]Our 2009 sales have been hurt by weak end-user demand and significant reductions in dealer inventory. In fact, dealers have reduced their machine inventories by about $1.5 billion through the first half of the year and could reach close to $3 billion by year-end.""

    And it looks like they don't see much improvement for the rest of the year.

    Given the pop in price and their debt loads, my guess is that they're going to start issuing new shares asap.

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