Fool.com: Caterpillar Plows Into Another Tough Quarter (News) October 15, 1999

Caterpillar Plows Into Another Tough Quarter

By Richard McCaffery (TMF Gibson)
October 15, 1999

Caterpillar (NYSE: CAT), the world's largest manufacturer of construction and mining equipment, reported Q3 income of $219 million, or $0.61 per share, far from last year's strong mark of $0.92 per share.

Sales and revenue fell 9% to $4.72 billion, down $458 million from last year due to lower industrywide sales and an unfavorable change in product sales mix. These changes were partially offset by lower sales, general, and administrative costs, as well as lower research and development expenses. Caterpillar's financial division reported strong growth, with revenue from financial services jumping 10%.

It's been a tough year for Caterpillar as fears of higher interest rates, the strong dollar, and weak global construction and mining markets have taken their toll on the Peoria, Illinois company. After a pretty strong first quarter, Caterpillar warned investors that 1999 growth would be less than previously thought. This was confirmed today when management forecasted a 5% decline in sales and revenue for the year. Company officials expect improvement in the industry next year as the worldwide economy strengthens, especially in Asia and South America.

Caterpillar stock hardly moved on the news since investors had already factored in a tough second half of the year. Caterpillar is down about 16% from its 52-week high of $66 7/16, reached in May after the good first quarter results. For the year, however, Caterpillar stock is up 17%.

This follows a five-year period during which Caterpillar expanded globally, diversified its business into less cyclical operations such as financing and logistics, increased sales 46% to $20.9 billion, and upped profits 58% to $1.5 billion.

But that growth has come at a price. Average return on equity (ROE) -- a measure of how well equity is being employed -- has fallen from 36.3% in 1996 to 30.9% last year. By the end of Q3, ROE had plunged to 19%. At the same time, long-term debt has grown from $5.1 billion in 1996 to $9.4 billion last year, and the company's growing asset base generated less in sales at the end of 1998 than in 1996.

Caterpillar's ROE remains high relative to the corporate average, and the 19% trailing ROE is probably an anomaly. Still, the fact it's moving in the wrong direction for the last 21 months raises questions about the cost of growth.

Caterpillar is second to none in terms of brand name and ability to compete globally, but investors are smart to set the bar very high, especially when looking at capital-intensive industries.

Feedback about News & Commentary? Please send mail to news@fool.com.