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Tuesday, April 21, 2009

Caterpillar $CAT 1Q:2009 results

Just 3 months ago, Caterpillar lowered the bar significantly, citing global uncertainty.  Their sales guidance had moved down to 40 billion, plus or minus 10% on EPS of $2.50 at the midpoint of that range.

This morning they guide to 35 billion, give or take 10% on EPS of $1.25 at the midpoint of that range.  The credit portfolio is backing up on them – past dues are now 5.4% vs 3.8% last quarter.  Their loss provisions inch higher but they seem hopelessly under-reserved against losses on these receivables – they are as reserved as they have been at prior troughs, according to the company’s historical comparisons.  This is not a typical decline and Caterpillar’s downturn has just begun to hit their results, despite the stock price telegraphing that it started a while ago.

The company seems open to cutting the dividend:

Q16:  Will the company decrease its dividend in 2009?
A:    Each quarter, the Board of Directors reviews the company's dividend and determines whether to increase, maintain or decrease the dividend for the applicable quarter.  On a quarterly basis, the Board will evaluate the financial condition of the company and consider the economic outlook, corporate cash flow, the company's liquidity needs, and the health and stability of global credit markets to determine whether to maintain or change the quarterly dividend.  Decreasing or suspending the quarterly dividend are potential actions which could be triggered to improve liquidity and will be reviewed and analyzed as the company focuses on "trough" management to weather the global economic recession.

Caterpillar is likely to see further credit quality deterioration as the downturn gathers steam – and it really has only recently begun.  The construction equipment market is likely to see further degradation as overcapacity issues become prevalent.  Construction equipment growth is dependent on simultaneous project activity as idle machines tend to find work.  With so many financially unviable projects in process and awaiting cancellation, there is no shortage of idle machinery.

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