< Return to Bulls pageProcess of adjustment should maintain CAT's stock price
Caterpillar on Monday said much the same thing. Their 4th quarter looks a bit better as sales were up 6% and though operating profit was off 64% most of that was due to increases in costs rather than a decrease in sales or prices. But business going forward is going to be rough. They are putting into place their “strategic trough plans” in preparation for a very difficult year. Sales are forecast to be off about 20% and machine and engine volume, their core business, off 30%. As a consequences, they are laying off 20,000 workers - about 11,500 of them full time employees, which works out to about 10% of their overall full time workforce (read CAT Earnings Release).
But what I’m focusing on is the fact that we’re moving along in the process of adjustment. Everybody now knows that the economy is in the tank. Companies have already taken and are continuing to take steps to realign their operations with the current environment.
Caterpillar earned $5.66 in 2008 and is forecasting trough profits of $2.50 in 2009. Again, that’s like 13 times next years earnings but a more attractive multiple on normalized earnings. From a longer term standpoint that includes more than just 2009 and takes into account years after that when the global economy will recover, these stocks are now getting to be fairly/attractively valued.
It now just becomes a matter of time, of reallocating labor and capital to fit the new environment which has to take place in the real world. But as far as perception and understanding, the stock market and most businesses seem to fully understand the current environment and what’s ahead. That means we’re well on our way to equilibrium and, absent any unforeseen shocks, the stock market is more likely to be range bound than dramatically lower in 2009.
