Caterpillar Plows Through

By Sham Gad | October 22, 2009 AAA

Global construction equipment giant Caterpillar (NYSE:CAT) reported that its third-quarter profit declined 53% year over year. However, the numbers blew away analysts' estimates.
Estimates forecast earnings to come in at six cents per share while the company delivered EPS of 64 cents per share. Still, the company profits are way beyond where it was last year when EPS was $1.39.

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Excellent Future Characteristics
Overall sales declined 44%, but the company stated that the third quarter marked the "low point" of the recession. The company boosted full-year guidance and now expects 2010 sales to be up 10-25%. While this indeed might be true, don't take that as a blanket statement.

Caterpillar is a business in a very enviable position today. That's why the shares currently trade for 20-times earnings and nearly 30-times 2010 earnings. In the short run, those are very pricey multiples. But Mr. Market is banking on a few other pieces of favorable info for Caterpillar.

Favorable Tailwinds
A weak dollar benefits Caterpillar like it does smaller construction company Terex (NYSE:TEX). A declining dollar makes the company's goods cheaper abroad and Caterpillar generates about 60% of sales overseas. Similarly, Terex derives the majority of it revenues outside the US.

Also, when commodity prices rise, demand for Caterpillar's equipment rises, too. And remember, Caterpillar is no small fish; it's one of the biggest players in its space. And with the emerging and developing nations, especially China, expected to report solid economic growth in the near future, Caterpillar will obviously benefit.

Of course, continued cost cutting has helped the company. Unfortunately, that bodes well for Caterpillar's investors but not so well for the overall economy which needs employed people to buy things.

The Weeks Ahead
It will be interesting to see the results of other global companies that are entrenched in the overall economy like Caterpillar. Agriculture companies like Archer Daniels Midland (NYSE:ADM) and commodity giant Teck Resources (NYSE:TCK) both do significant business overseas and deal in products that are at the forefront of economic recoveries.

The Bottom Line
But take those figures as just one sign - these companies benefit from government spending - and that can't last forever. In addition, consumer staple businesses like Procter and Gamble (NYSE:PG) will show how the other side of the equation is doing. And that's a very important variable in the long run. (For more, check out A Guide To Portfolio Construction.)

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