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2012 Won’t Be CAT’s Year. But Stick Around

Patience: CAT's bargain valuation still makes it a long-term buy

   

Some big economic bellwethers are dropping like flies — their earnings outlooks, that is.

Caterpillar (NYSE:CAT), the world’s largest maker of construction and mining equipment, just chopped its profit forecast for 2015 on sluggish global growth.

The Dow component follows a some other key profit warnings. FedEx (NYSE:FDX), the global shipping company, reduced its guidance after witnessing a drop in express shipping, notably in exports from China. Closer to home, railroad operator Norfolk Southern (NYSE:NSC) recently slashed third-quarter guidance because of lower shipments of coal and merchandise here in the U.S.

It’s no secret global growth is slowing markedly. Europe — China’s biggest trading partner — is in a recession that’s getting deeper every day. And although the U.S. economy is (barely) trudging along, it’s not growing nearly fast enough to offset weakness pretty much everywhere else.

It all adds up to lower prices for commodities like copper, iron and aluminum — and so miners have cut back on purchases of CAT’s gear.

The timing is pretty brutal. A year ago, CAT bought mining equipment maker Bucyrus International for nearly $8 billion, the biggest acquisition in the company’s history. That deal made CAT the biggest maker of mining equipment in the world — just as demand began to fall off.

“We’ve seen a slowing in economic growth more than we expected,” Caterpillar CEO said at a mining industry even in Las Vegas Monday. “We expect fairly anemic and modest growth through 2015.”

And with that, CAT cuts its 2015 profit outlook to $12 to $18 a share, down from $15 to $20.

Oberhelman said he thinks the company can still get to $15 to $20 a share in 2015, but the world needs better economic growth, and with that in doubt, tamping down expectations was the prudent thing to do.

Fair enough: It’s always better for a CEO to underpromise and overdeliver, and 2015 is still a long ways away.

Yes, that pretty much seals the deal on CAT not being one of InvestorPlace’s 10 Best Stocks for 2012 — even though I still like it over the next three to five years.

CAT was flat on a price basis for the year-to-date before it dropped the guidance bomb, and up just shy of 2% after adding in dividends. Either way, it’s lagging the S&P 500 by about 16 painful percentage points.

It’s going to take a huge fourth-quarter rally to make this stock a market-beater this year, and sputtering global growth makes that look highly unlikely.

However, as CEO Oberhelman rightly points out, demand won’t stay down forever, and when it resumes, no company is better positioned to win than CAT — especially in China, the once-and-future engine of the global economy.

Even amid a pretty dismal year for materials and industrial companies, CAT has been booking record profits. And future earnings, while scaled back, don’t appear headed off a cliff.

That makes CAT’s valuation as compelling as ever. It now sports a forward price-to-earnings multiple of 8.5, still about a 50% discount to its own five-year average, according to data from Thomson Reuters Stock Reports.

CAT was a bargain at $90, and it’s still a bargain here at $88 and change. Shares are poised for outperformance over the next three to five years, even if 2012 turns out to be a dud.

As of this writing, Dan Burrows held no positions in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/09/2012-wont-be-cats-year-but-stick-around/.

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