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Monday, January 26, 2009

Caterpillar comments post conference call

First question is about the 2010 upturn.  The company declined to discuss a potential upturn having just disclosed a significant downturn.

They say they might have a loss in Q1.

JPMorgan asked about the potential for credit downgrades due to the necessary refinancing in 2009.  The company declined to guess what rating agencies will do.

The company talked about how well capitalized their dealers are.

The Skew:  Investors are conditioned to like this stock for its leverage on the upside.  I don’t disagree with that thinking, but I’m looking at Caterpillar as a company dependent on credit derivatives.

Caterpillar is one of the few large caps that sells receivables to generate cash.  Both CAT and DE did this as recently as the middle of last year.  I think in a world of risk aversion, receivables on in-process construction projects would qualify as extremely speculative.  They are likely to see a much tighter credit market and will have more trouble generating credit for their base.  Credit default swaps for the company have risen today – 25% the last time I saw a quote but I don’t get those in real time.  The point, though, is that people are starting to become concerned about Caterpillar’s debt and ongoing capital requirements.

Caterpillar’s 1.44% allowance for credit losses seems perilously low.  They are likely to see increased scrutiny on their balance sheet and it would surprise me if their credit rating does not see downgrades.  Investors hoping to hold the stock for a cyclical upturn are likely to flee if potential credit problems move to the forefront of Caterpillar headlines.

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