Rare Optimism from Caterpillar's CEO

Posted by: Ben Steverman on July 21, 2009

The recession has been tough on companies like Caterpillar (CAT). The heavy equipment maker has slashed production and cut thousands of jobs. Investors have seen Caterpillar shares lose half their value since the downturn began.

So it’s an important day when we hear some optimism from Caterpillar’s management team. When the firm reported second quarter earnings on July 21, chairman and chief executive Jim Owens issued this statement:

There is still a great deal of economic uncertainty in the world, but we are seeing signs of stabilization that we hope will set the foundation for an eventual recovery. Credit markets have improved significantly. Fiscal policy and monetary stimulus have been introduced around the world, and we are seeing signs, particularly in China, that they are beginning to work. In addition, we’ve seen many key commodity prices increase from their lows in the first quarter, and they are holding in a range that is usually positive for investment.

To review, those are a surprising array of reasons for hope: Credit markets are better, presumably helping Caterpillar’s customers get financing for equipment purchases. Government efforts to revive the economy might be working, especially in China, and may support spending on infrastructure. The recovery in commodity prices is apparently giving Caterpillar’s customers — in mines or oil fields, for example — the confidence to buy again.

Shares of Caterpillar jumped 7.7% on July 21, the day the news was released. Despite falling 66% from a year ago, Caterpillar’s profits were called impressive by analysts. The firm earned 60 cents per share, beating Wall Street analysts’ expectations of 22 cents per share.

There are still plenty of concerns about Caterpillar. Execs warned the third quarter of 2009 could be weak. Owens is seeing “signs of stabilization,” but not recovery. The housing industry remains weak as do other industries that are key users of Caterpillar products.

Despite this, Owens’ willingness to show a little optimism was a welcome sign.

Reader Comments

The Mad hedge Fund Trader

July 29, 2009 2:04 PM

Another great “tell” stock for me is Caterpillar (CAT). I have never owned CAT in my life, but have always followed the company closely because it speaks volumes about the state of the world economy, and because they used to hand out those neat yellow hats at the analyst meetings. CEO, Jim Owens, says that only painful job cuts held the decline in earnings to 66% on a 41% fall in revenues, with the emphasis on the word “earnings” in the most severe conditions since the thirties. The news was good enough to take the stock up a whopping 40% in a week. CAT gets 61% of its revenues from abroad. Business in Western Europe and Japan is worse than in the US, and what strength they are seeing is in Asia, with China up 8%. Large customers are seeing a resumption of credit lines, while smaller and medium sized ones are not. Owens sees a turnaround beginning in Q4, and a full scale recovery beginning next year, as the cyclicality of its major customers in construction, mining, and energy kicks in to the upside. Longer term, Owens sees CAT’s future in the ongoing infrastructure build out in the emerging markets. Hey, didn’t FCX just tell us that? Is there a trend going on here? www.madhedgefundtrader.com

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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