The stock market is truly insane. Last week's sell-off was
supposedly due to troubles in
. What company is correlated to goings-on overseas?
of course, and yet its shares are up more than 4% today thanks to
a better-than-expected profit report. Before the market opened,
the company reported a profit of $1.54 per share, beating
estimates by 26 cents per share.
Revenues also beat expectations, coming in at $14.4 billion
versus an estimate of $13.61 billion. Caterpillar sees fiscal
year earnings per share of $5.85 per share excluding items in
2014. That exceeds the $5.80 average estimate currently
also authorized an additional $10 billion stock buy-back.
It's a full-frontal assault on those who are speculating on
Caterpillar's demise. A close look at the numbers and current
valuation should still give investors pause.
The real risk to the global economy is deflation. Chinese
economic data last week was poor. These are not positive
Before the report was released, analysts expected Caterpillar
to grow profits by 6% in 2014. The new estimate does little to
increase that percentage growth rate. With shares trading
for 16 times 2014 estimated earnings, the stock is expensive
relative to potential growth.
In other words, I would use the buying in the stock today as a
Concerns about emerging markets are quite real. The story does
not jive with management's expectations that sales are
stabilizing. The risk here is to the downside.
Over the last four quarters, Caterpillar missed earnings
expectations. Does one quarter beating the number justify the
move higher today?
Not really in my opinion. It is a knee-jerk reaction.
I suppose the company is to be commended on a strong quarter,
but on another down day in the market bidding up Caterpillar
stock does not make sense.
So who are we to believe?
The market is predicting chaos for
. Caterpillar is saying something entirely different. It sees the
world economy improving, hence the confidence to raise
Somebody is going to be wrong here.
Interestingly, Wall Street appears to be just as perplexed by
the results. Usually when a company beats expectations, raises
guidance and offers a stock buy-back, analysts increase price
targets or ratings very quickly after the news is reported.
That is not happening with Caterpillar stock. There is still a
healthy dose of skepticism.
My guess is that Wall Street will take the news in stride with
most firms covering Caterpillar maintaining ratings at best. A
brave analyst here or there might even suggest that buying is an
opportunity to sell the stock.
That's how I would play it for sure. There is much more
downside risk than for upside surprise with Caterpillar.
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