It's been less than four months since giant Illinois-based equipment maker and industrial star Caterpillar (NYSE:CAT) unveiled a more thoroughgoing turnaround than any of the Olympic gymnasts you saw in Beijing this past summer. Indeed, in late August, the big company announced that it would spend $1 billion during the next three years building facilities in emerging markets.
As this week dawned, however, the company announced that, because of the relatively sudden mashing of economic brakes in those same emerging markets, it will cut its executive compensation by as much as a half next year. According to the company, pay for Cat's top dogs will be cut by up to 50%, senior managers by a range of 5% to 35%, while the managers a layer down will have their wages reduced by as much as 15%. And beyond that, the company will offer voluntary buyouts to management and support staff in the U.S.
The company's August announcement had included plans for a research-and-development center and factory expansion in China. At that time, CEO James Owens said Caterpillar was effectively sold out in China through 2010. It all sounded terrific at the time, but Caterpillar wasn't alone in its late summer euphoria: Such other U.S. based companies as Deere (NYSE:DE) and DuPont (NYSE:DD) were then extolling the virtues of expanding their own facilities overseas. Nowadays, Deere in particular is presenting a more guarded outlook.
Caterpillar, which uses many of the same suppliers as the likes of General Motors (NYSE:GM) and Ford (NYSE:F), has grown so rapidly recently that its work force has doubled in size during the past half-decade. With those conditions as a backdrop, until recently, the company was struggling to meet global demand.
Now, however, its executives, whose compensation is based on a salary along with goal-based cash payments and stock options, appear to be facing a far bleaker world in 2009. The culprits in creating the company's current downturn include Asia-Pacific sales growth, which rose by 16% as recently as October, only to fall back to 5% last month. Similarly, sales growth in Latin America fell to about half of its October level in November.
As to investments -- or lack thereof -- in Caterpillar, my inclination is to watch the company very closely and perhaps do a little nibbling for a while, but not to develop too voracious an appetite for its shares. With its forward P/E under 9.0 times, its general lack of toe-to-toe competition, and a dividend yield pushing 4.0%, when the global economy begins to improve, this generally solid company could be a good place to have hidden away some shekels.
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