Caterpillar shareholders received quite a scare after the close of trading last Friday when the company announced that its third-quarter profits would be about 15% below analysts' consensus estimates. Despite the negative news, the stock was up Monday. Caterpillar's management has reasserted its efforts to aggressively reduce costs, and insists that sales and revenues will improve slightly compared to 1999.
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The company said that this smaller-than-expected profit was a combination of weakness in the euro and pound sterling, continued softness in the North American construction and global mining industries, accelerating weakness in the market for truck engines, the negative effect of high energy costs, and continued intense competitive pricing pressures. Caterpillar's products move the earth; its announcement moved the ground under the company's recent positive outlook.
Pouncing on Caterpillar's not-so-positive news were some oh-so-timely analysts, two of whom promptly closed the barn door after the CAT was out, and downgraded the stock.
The company, however, is not taking the announcement sitting down, and continues to actively pursue shareholder confidence. It has reasserted efforts to aggressively reduce costs this year. Plus, it sees continued strength in the demand for large engines for electric power and energy development applications. Caterpillar bulls remain bullish because these products are among the company's most profitable, and remain the fastest-growing segments of the business.
Management is also continuing its stock repurchase program, supporting an implied assertion that the stock is undervalued. In the first half of this year, the company repurchased more than 8 million shares. Management is planning to reduce the 345 million outstanding shares to 320 million. The stock buyback will increase earnings per share, because there'll be fewer shares outstanding by which earnings will be divided. Shareholders greatly enjoy increased share value.
There's more good news. The company insists that sales and revenues will still improve slightly compared to 1999, and profits are expected to increase moderately.
Insiders continue to hold 44.9 million shares and haven't sold a single one in the last six months. (They haven't bought any additional shares either; but the tight hold insiders maintain on their current holdings shows optimism in the company's future.)
Institutional ownership remains at 61.1% of shares outstanding, which is slightly higher than the industry average of 55.3%. The institutions have not rushed to sell during this temporary setback.
The irony, of course, is that the stock price rose despite the negative news. The first reaction on Friday when the news was released was panic, especially in light of the overreaction to similar warnings by Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> and Apple Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %>. Caterpillar dropped 11% in after-hours trading, the lowest level since May 1996.
But... Monday saw Caterpillar crawling higher. Apparently there's a general belief that Caterpillar has bottomed and there's only one direction to go from this point. Upsy!
According to Peter Coolidge of Brean Murray Foster Securities, "It's a positive signal that, in spite of what Caterpillar pre-announced, things are up. It's a new quarter, so new positions are being established. There's a feeling out there that you want to participate on these downswings as a buying opportunity."
Those of us "out here" are truly hoping we've seen the bottom.
So, what do we as Fools learn from all this? Trying to predict the market's reaction to earnings reports (or warnings) is futile. Last quarter, Caterpillar beat analysts' estimates, while showing growing earnings and revenues. Revenues were up 5% over the second quarter last year, and earnings per share were up 15%. How did the stock react to the news? It dropped almost a dollar per share.
Back in April, Caterpillar reported first-quarter earnings of $0.73 a share, smashing through the First Call consensus estimates of $0.58 per share. While one would expect such a report to send the stock higher, it merely languished over the following months.
If investors reacted logically, good news would send stocks soaring while bad news would set them back. While this is often the case, it can't be consistently counted on, because it's difficult to know just how much anticipated news is built into a company's stock price. This is the primary reason we Fools don't try to time the market; we just keep our eyes focused on the fundamentals of the businesses we follow.
Of course, with the Foolish Four, it's not necessary to follow your stocks on a quarterly basis. Doing so, however, and watching the direction of profits and revenues, is good practice for stocks you may select on your own -- and it is often rather amusing.
Complete third-quarter results for Caterpillar will be released October 17. At that point, we will get more comments on the sales, revenue, and profit for 2000, plus management's outlook for 2001.
We'll be watching. But we won't be placing bets on how the market will react, especially since this CAT has nine lives.