Before the open on Monday 10/22/12, Caterpillar (CAT - Analyst Report) reported earnings
for the third quarter of 2012. The beat of expectations contained a
few one-time items and when we back out the options expense we see
that the company beat expectations by $0.06 or about 2%.
While CAT is a Zacks #5 Rank (Strong Sell) there are still lots of
things we can learn from the conference call. So a quick review of
what was said on the CAT conference call: 1. dealers stating they have
too much inventory, 2. 2/3 of lower guidance is due to construction
and 1/3 for mining and power systems, 3.Europe is going to be weak and
China won't see growth until new year.
The 800 lb. gorilla in the space is a Zacks #5 Rank (Strong Sell), so
it is not too surprising that most of the names in the group do not
carry the coveted Zacks #1 Rank.
Let's start with Zacks #3 Rank (Hold) Terex (TEX - Analyst Report) which is more
focused on cranes and aerial work platforms than the monster earth
moving vehicles that CAT makes. Since construction isn't that much of
a concern and they have limited exposure to mining and power systems
the weakness from CAT may signal that a buying opportunity for TEX.
Over the last three quarters, TEX has shown some outstanding earnings
momentum. Starting with a $0.01 beat in the December 2011 quarter,
the company has delivered strong beats on an absolute and percentage
basis. The March 2012 quarter saw a beat of $0.06 or 26% ahead of the
Zacks Consensus Estimate.
The most recent quarter was a blowout, with the company reporting
earnings of $0.75, or $0.26 ahead of the Zacks Consensus Estimate.
The beat of 53% was a big driver for the stocks 27% move the following
Now the company is slated to report again, and analysts may be a
little low with their expectations. In the most recent quarter,
analysts were expecting $0.49 and now they are looking for $0.50.
When we look back to last year, we see that the company had a solid
beat of $0.08 or 36% ahead of the Zacks Consensus Estimate in the
third quarter of 2011.
Terex is slated to report earnings on 10/24/12 after the close
with its conference call being held the following morning.
Another name that is going to be impacted by the CAT
Joy Global (JOY - Analyst Report). The company is
much more focused on mining, and with that being a direct cause of the
tempered growth rates, a deeper look is warranted.
Over the last four quarters, JOY has produced three misses and one
positive earnings surprise. The beat came in the April 2012 quarter
where the company reported earnings per share of $2.04, $0.09 or 4.6%
ahead of the Zacks Consensus Estimate. Despite that beat, shares
traded lower by 5.6% in the session following the report.
In fact, over the last four quarters the stock has dropped following
each of the earnings releases. The October 2011 quarter saw the stock
fall by 12% in the session following the release. The January 2012
quarter saw a 4.6% decline and the most recent quarter saw a 2% slide
in the next trading session.
We have heard about a larger slowing cycle for the miners, and most of
that is coming from the weaker demand in China. Their boom cycle of
outrageous GDP growth is tuning to bust, and the miners are among the
first to feel the pain of a huge source of demand basically going into
shut down mode.
The valuation picture for JOY be an even bigger trap than a shut down
mine. Yes the metrics are well below the industry average, but the
industry and the company are likely to experience slower growth over
the next several quarters.
The revenue estimates tell the tale that the last quarter was likely
the peak for the industry. The company saw growth from 2Q11 to 3Q11,
but for 2Q12 to 3Q12, the estimates are calling for a sequentially
lower number. 3Q12 vs. 3Q11 will still show growth, but its becoming
clear that future growth will be constrained.
Finally we have a play that is a little bit of a reach, but could be
the wave of the future.
Westport Innovations (WPRT - Snapshot Report) is in the
production of natural gas-based engines. This falls in the power
generation segment even though the target market for WPRT is
WPRT is still quite small, and not even a blip on the screen when
compared to CAT. Being small can have its advantages, including a
significantly stronger revenue growth rate. The company is expected
to report revenue of $101 million for the September 2012 quarter, up
more than 25% from the $80 million posted in the year ago period.
Earnings estimates for 2012 have moved from a loss of $1.30 in July to
current level of a loss of $1.14, an increase of 12%. Over the same
period, estimates for 2013 haven't moved that much, inching lower by
about one penny. Analysts do see an improvement though, with earnings
for 2013 projected to come in at a loss of $0.73, which implies
earnings growth of more than 35%.
The valuation metrics for WPRT are skewed seeing as the company is
losing money and will continue to do so next year. The more
conservative measure of price to book has WPRT trading at 3.9x, well
above the industry average of 1.6x. Price to sales shows an even
greater premium of 4.3x compared to a 0.5x industry average.
Caterpillar earnings were positive but the outlook that was revised
lower. That type of mixed report can still provide investors with
some insights as to where you can find outperformance and where you
may be disappointed. Shares of Terex (TEX - Analyst Report) should do well in light of
the news out of CAT, but shares of Joy Global (JOY - Analyst Report) will likely
disappoint following earnings. Shares of Westport Innovations make
take a while before reaching full potential and the weakness from a
player like CAT could be a good thing for WPRT.
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Brian Bolan is a Stock Strategist
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