Caterpillar Is Feeling the Squeeze

But slow growth in Europe and China may be priced in

By Tom Taulli, InvestorPlace Writer & IPO Playbook Editor

CaterpillarOn news of its third-quarter report today, Caterpillar (NYSE:CAT) stock slipped in early-morning trading, but the fall was short-lived. The stock rebounded and is now up about 0.5%.

In Q3, earnings climbed by 49% to $1.7 billion, or $2.54 per share, and revenues rose by 4.6% to $16.45 billion. Analysts were looking for earnings of $2.22 and revenues of $16.77

Lessons From Europe for an American Abroad
Lessons From Europe for an American Abroad

And yes, CAT’s outlook was a bit of a disappointment. For the full year of 2012, Caterpillar is now forecasting EPS to range between $9 to $9.25 per share and revenues to be $66 billion. The prior guidance was for $9.60 in EPS and revenues of $68 billion to $70 billion.

In fact, the company figures 2013 revenues will be about the same as this year’s, plus or minus 5%. The Street was forecasting a revenue gain of 4%.

As should be no surprise, Caterpillar is feeling the pressure from the slowdown in global growth, especially in China and Europe. It’s been the same story with other multinationals like McDonald’s (NYSE:MCD), IBM (NYSE:IBM) and Intel (NASDAQ:INTC).

Keep in mind that foreign central banks have had relatively tight monetary policies, which has been a drag on growth. What’s more, uncertainty continues regarding the upcoming presidential election and America’s “fiscal cliff.” So, in such an environment, it’s easy for Caterpillar’s customers to hold off on purchases of bulldozers, wheel excavators and backhoe loaders.

Yet, there still are positive signs. For example, the recovery in the U.S. housing market should be a nice boost. Caterpillar has a strong presence in the construction equipment segment.

As for CAT’s valuation, it is certainly reasonable. The price-to-earnings ratio is about 9x. The dividend is also at a decent 2.5%.

But again, the macroeconomic headwinds will likely last through 2013, which will mean stalled growth. Thus, for those looking at investing in Caterpillar, the opportunity is mostly about CAT’s long-term potential. And that certainly is bright. No doubt, the company continues to generate strong cash flows, has a top-notch brand and has an extensive dealer network, which spans 138 countries.

In the meantime, though, the stock isn’t likely to have any major catalysts to get it moving. So, investors should be in no rush to jump into it for now.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.”  Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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