Will Obama’s Infrastructure Plan Save Caterpillar (CAT)?

by Jamie Dlugosch | January 26, 2009 11:32 am

Shares of Dow component Caterpillar Inc. (CAT[1]) tumbled 10 percent Monday morning after the maker of heavy-duty equipment said fourth-quarter profit fell 32 percent from a year ago and cautioned that 2009 will be a “very tough” year.

The company reported earnings of $661 million, or $1.08 per share compared to earnings of $975 million, or $1.50 per share in last year’s fourth quarter. Revenue rose 6 percent to $12.92 billion.

Caterpillar reduced expectations for the current year, with revenue and sales now forecast to be about $40 billion with $2.50 per share in profit. For all of 2008, revenue and sales were $51.32 billion with earnings of $5.66 per share. (See also: Caterpillar Bulldozes Through the Bond Market[2].)

A Terrible Quarter

Caterpillar Chairman and CEO Jim Owens said the company was “whipsawed in the fourth quarter as key industries were hit by a rapidly deteriorating global economy and plunging commodity prices.” He said Caterpillar was hit with significant order cancellations after the company encouraged dealers to align their inventory levels with falling volume.

As a result a first-quarter loss is now not out of the question as costs outweigh falling orders from dealers who would normally be stocking up on equipment ahead of spring and summer construction demand.

In response to the weakening conditions, Caterpillar announced 5,000 new layoffs Monday in addition to several earlier actions, bringing the total to about 20,000 employees, contract and agency workers. The layoffs, along with about 2,500 workers who’ve already accepted buyouts, represent the biggest wave of job cuts at the company since the early 1980s.

Those whose jobs haven’t been cut can look forward to seeing their salaries frozen while the total compensation of executives and senior managers will be significantly reduced.

Caterpillar had largely weathered the decline in housing as worldwide construction projects picked up the slack and fueled demand for commodities such as coal, which in turn led to surging demand from mining companies.

Sky-high oil prices last year led to large orders from energy companies, but the worldwide recession has led to slumping commodity prices while the seizing up of the credit markets has added additional pressure on the company’s results.

Implications of the Infrastructure Plan

Analysts believe President Obama’s infrastructure spending program will not be as big a boon for Caterpillar as many investors hope. They warn it will have little effect on near-term equipment demand, and that the figures would be insufficient to stem Caterpillar’s slide given steep declines in the U.S. construction market.

I highly doubt CAT[1] management would have pulled the plug on 20,000 jobs if they thought infrastructure spending would be the end all be all.

Longer term, CAT should be a big winner as global expansion opportunities abound.

This article was written by Jamie Dlugosch[3], contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com[4]. James F. Dlugosch contributed to this article.

  1. CAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=cat
  2. Caterpillar Bulldozes Through the Bond Market: https://investorplace.com/experts/james_dlugosch/articles/caterpillar-cat-bulldozes-through-bond-market.html
  3. Jamie Dlugosch: https://investorplace.com/experts/james_dlugosch/bio.html
  4. www.InvestorPlace.com: https://investorplace.com

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