Cat Call

Seeking Alpha has the full transcript of the Caterpillar conference call; if you haven’t seen them yet, head over to:

Caterpillar Inc. Q3 2007 Earnings Call Transcript

They are utterly sobering. It makes you wonder what other people are seeing when they claim the economy has little chance of a recession:

Caterpillar’s CEO noted "This was the best quarter for sales and revenues ever,
not just the best third quarter. In terms of profit per share, it was
the best third quarter in our history and our second-best quarter of
any quarter ever. . . The growth was driven by continued and
significant strength in sales outside North America, continued strength
in a number of key global end markets, like mining, oil and gas, and
engines for electric power generation, marine, and industrial
applications. Sales and revenues increased 36% in the Europe, Africa,
Middle East region, 30% in Asia-Pacific, and 20% in Latin America."

So the following comments are not those of a CEO making excuses for poor performance:

"…sales and revenues in North America were down 11%. From an end
market standpoint, inside North America,
it is a very weak picture for many of the industries that we serve.
U.S. housing is down and we expect it to continue its decline.
Non-residential construction is weak. Coal mining and quarrying are
down in the U.S. And on-highway truck engines are down significantly
from last year and we do not see much sign of a major turnaround for

Housing is a drag on the U.S. economy, and the U.S. is a drag on the global economy . . .

via Dr. Duru

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What's been said:

Discussions found on the web:
  1. Dave commented on Oct 22

    Housing may be a drag on the US economy, but the US export sector isn’t

  2. Justin commented on Oct 22

    But how long can the U.S. Export sector continue to chugg-along? I’m seeing signs of both Japan, and Europe weakening. In some countries in Europe the housing run-up was bigger than in the U.S…and is now showing major signs of cracking.

    Another thing, what type of inflation is this anyhow? Energy would suggest that it is cost-push, right, because demand pull would pull up the core-rate more? Any inflation gurus out there?

  3. JohnnyB commented on Oct 22

    Global Growth lagging indicator? So at what point does the anemic American economy affect global growth Barry?

  4. Kp commented on Oct 22

    So how much export activity would it take to offset the housing “slowdown”?

    Are we close to that now? Is it likely to be closer in the future?

  5. Dave commented on Oct 22

    It doesn’t change the core point, but the truck engine slowdown is an aberration due to a change in emission laws.

    Yes, the CAT execs had absolutely no need to whitewash anything on this CC. Their statements on the US economy were simply there view of how sails are going.

    But what what a slowdown in CAT domestic sales really mean anyway? We know the economy really runs on doughnuts and web clicks.

  6. ajr3x commented on Oct 22

    I don’t know how big CAT’s truck engine business is as a % of its rev, profits, and free cash flow, but it’s worth noting that Class 8 trucks (i.e., big 18-wheeler rigs) are in a cyclical downturn due mostly to emissions standards that took effect on 1/1/07. These standards raise the cost of engines which encourages massive pre-buying ahead of their implementation. As a result, sales in this category are expected to be down 40% to 50% this year. US production in Class 8 was ~378K in ’06 and will plummet to ~200K to 225K in ’07. This is a widely known fact for those who follow this industry.

    The next round of truck emission standards take effect on 1/1/10. So, while we’ll probably see more absorption of the last demand surge in the next few quarters I would expect a strong uptick in truck demand in 2H08 and throughout 2009.

    The big swing factor, of course, is the US economy, which is undoubtedly soft right now. Each point of GDP growth tends to require an additional 25K trucks to meet the logistics demand inherent in that growth. Thus, the extent of the next cyclical truck upswing is somewhat dependent on how much growth (or lack thereof) we see going forward. Still, CAT and the rest of the truck players (PCAR, Volvo, Navistar, etc.) should see ’07 as a bottom with a modest rebound in ’08 and likely stronger rebound in ’09, even if the economy fails to surge. Then, results will soften again in 2010 and we’ll gradually repeat the same cycle all over again.

    Again, not sure how significant this is to CAT, but thought I’d point out a little of the nuance that makes the negative commentary a little more understandable.

    I enjoy the blog, Barry.

  7. Greg0658 commented on Oct 22

    Emission standard situation – wasn’t aware.

    Next – oil costs & region volatility vs. our vast shipping expanse from the 3 coasts.

    Hows GE doing on electric train engines burning coal from the tender car? Add a tender tanker to capture CO2 for emissions. Batteries are probably not feasible with tonage involved.

    Then Cat can focus on short haul engines, and truckers can be home more to spend their money.

  8. me commented on Oct 22

    Cat aren’t these the guys that the CEO was Mr. Bigshot for screwing the union, cutting wages, reducing benefits, taking home a huge paycheck and oh yes, that was the answer to the promised land? Looks like another union bought a bill of goods and loses anyhow.

  9. JJL commented on Oct 22

    I noticed the tone was different today on the web and on TV. There seems to be some real waking up going on in regards to the loan losses by the banks. People were actually putting off a housing bottom until 2009! I was wondering if you picked up any difference in sentiment today?

  10. Don commented on Oct 23

    Anecdotally, the new Cat truck engines (’08 compliant) are not performing that well.

    I have seen rumors they will exit the truck engine business when the’10 standards come into play.

    Two of their major customers are going to begin building their own heavy diesel engines (PACCAR and Navistar).

  11. Eric commented on Oct 23

    The most surprising comment was about non-commercial construction. Other data sources have suggested non-commercial building has been strong. One example is the AIA Index, which measures architect’s billings. August 2007 was the second highest level since August 1998. See:

    How to square those data points?


  12. commented on Oct 23

    Opening Bell: 10.23.07

    Nike to Buy Soccer-Shirt Maker Umbro for $580 Million (Bloomberg) Back when we were youngsters, kids couldn’t get enough of Umbro’s checkered soccer shorts. Seriously, they were the cool thing in school. We had a couple pair ourselves. Now…

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