January 5, 2007

Hungary CAT

Back in October, Dow component Caterpillar (NYSE: CAT) issued lower guidance and then underperformed adjusted expectations anyway. At the time, the likes of CNBC cared less about the company's business than about the underperformance dragging the Dow Jones Industrial Index back below 12,000.

So what happened? A legal settlement with truck maker Navistar, for which Caterpillar makes engines, took a bite out of earnings, and the rest fell to higher manufacturing costs. More troubling, management said that it saw a macroeconomic slowdown coming in 2007, which put a damper on future expectations.

It wasn't really that bad a quarter, with 21% year-over-year earnings growth, but the market wanted more, and the stock price dropped like a rock. Caterpillar still lingers in that lower trading range today, so it's not too late if you want to grab some shares of the big Cat on sale. The next earnings report is due in about three weeks, and that's when we'll start to see whether this shortfall was a one-time stumble or a deeper malaise. I still believe in what I said about the company's prospects back in October:

"Caterpillar is for you if your investment horizon goes beyond the next few quarters and into the next decade. Even if earnings shrink a bit, Caterpillar has a solid income stream and massive cash flows. Management feels confident enough in the company's future to carry on with a generous share repurchase program, as well as a 20% dividend boost earlier this year. It's hard to find anything fundamentally wrong here."

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