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The stock market is truly insane. Last week’s sell-off was supposedly due to troubles in emerging markets. What company is correlated to goings-on overseas?
Why Caterpillar (NYSE: CAT), 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 expected.
The company 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 conditions for Caterpillar stock.
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 selling opportunity.
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 emerging markets. Caterpillar is saying something entirely different. It sees the world economy improving, hence the confidence to raise guidance.
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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