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It says something about Wall Street estimates when a big, important company cuts its sales target to a level well below the analysts' consensus – and the stock rises. This is what happened at Caterpillar on Monday. The maker of life-sized Tonka Trucks and industrial generators cut its 2013 sales estimate by 8 per cent, to $59-billion (U.S.) at the midpoint. The Street had wanted $63-billion. The stock rose 3 per cent.
Caterpillar's news was no surprise to those who follow the mining industry, which accounts for roughly a third of the company's sales and where weak demand led to the lower outlook. Mining bosses have been signalling their intention to cut spending. As Glencore/Xstrata chief Ivan Glasenberg bluntly put it: "It's time to stop building." The "big four" miners (Xstrata, Anglo American, BHP Billiton and Rio Tinto) spent almost $50-billion on capex last year; $35-billion is expected for 2014.
U.S. power plants shifting from coal to shale gas won't help sell diggers and dump trucks, either. Investors have heeded the signs, and have sent Caterpillar's shares down almost a fifth over three months.
The question is whether the share price now fits the outlook. There are reasons for hope. The price/earnings multiple, at under 10, is now well below its long-term average. In the past two decades, single-digit ratios have been rare outside of the 2008-09 crisis. Operating margins have come down toward normal levels as well.
The company is right to point out that the awful sales result in the first quarter (down 18 per cent year on year) would have been milder (down a mere 9 per cent) were it not for inventory shifts. And finally, Caterpillar's order backlog, which fell sharply in the third and fourth quarters, seems to have stabilized.
The worry is that some investors are still harbouring hope of a near-term rebound in sales or profit; when it doesn't come, the optimists' capitulation could hit the shares again. Of course, Wall Street estimates for 2014 and 2015 forecasts call for precisely such a rebound. But who would believe them?