As earnings season continues, one of the blue chips I’ve been anxious to hear from is Caterpillar Inc. (NYSE/CAT). The reason I like to hear from Caterpillar rather than other large blue chips is because Caterpillar has firsthand knowledge of how healthy the world economy really is, because it’s involved in so many businesses, especially internationally.
The company has come out with mixed information regarding the future. While Caterpillar is forecasting sales growth in 2013 to be the lowest over the past four years, the company’s CEO holds the market view that there won’t be a recession anywhere in the world.
One area that might affect the general market view for the stock is the declining level of backlog orders. The company reported that its backlog was $23.1 billion at the end of the most recent quarter, a decline of 18.0%. The largest segment of decline was the resource sector, as mining companies have the market view that the global economy will continue its decline and are ordering less heavy equipment from blue chips like Caterpillar.
Sales for the third quarter were up 4.6% from the previous year, with net income rising 49.0% over the same period in 2011. Overall, the market view for Caterpillar had been expecting similar results as the stock was only marginally down.
Following the results, Doug Oberhelman, Caterpillar’s CEO, appeared on CNBC to discuss his market view for the future. Oberhelman stated, “I don’t predict a recession anywhere in the world at all in 2013,” but he went on to state that Europe is a major concern with massive levels of uncertainty. (Source: “No Recession, but Lots of Uncertainty,” CNBC, October 22, 2012.)
While Oberhelman did have a market view that both China and the U.S. housing market have hit bottom, including his opinion that he’s optimistic regarding China in 2013, he did state that more is needed for strong growth.
This is yet another CEO from the many blue chips who has stated a market view that massive levels of uncertainty exist, mostly related to political instability and an inability to accomplish pro-growth policies; this is hurting many countries around the world.
With elections in the U.S., the “fiscal cliff” issue, the change in government leadership in China, and, not to mention, the massive political problems on top of existing fiscal issues in the European Union (EU), this is creating the type of uncertainty that is a massive drag to many economies around the world.
Chart courtesy of www.StockCharts.com
The stock clearly had a market view anticipating less-than-spectacular results, as it has already sold off significantly for the year. The stock will most likely trade range-bound before breaking out to either side. I think it ultimately depends on what happens with fiscal policy in the States, combined with new Chinese monetary easing or some agreement in Europe to see significant upside. If all of the bad news is priced in, perhaps this might be a long-term opportunity for blue chips such as Caterpillar if one were to believe that at least some of these issues will be resolved shortly.
While Caterpillar’s CEO did state that in some markets, such as the U.S. housing market, there are signs of a bottom, he also voiced his opinion that we are far from a full recovery. There is much work that needs to be done and, hopefully, once the elections have been completed in America, the politicians will understand that they are holding back the full potential of economic growth and get to work.