Caterpillar Balancing Out

Caterpillar Inc. (CAT - Analyst Report) reported third quarter EPS of $1.39, below our expectations of $1.59, due to higher material costs, weaker machine sales volume in North America and Europe, and an unfavorable currency movement.

The company maintained its full-year 2008 outlook. The company expects sales and revenues to top $50 billion and EPS to be about $6.00. For 2009, CAT currently expects sales and revenue to be about flat with its 2008 results. As long as commodity prices stay above the marginal cost of production, we believe global mining and energy markets can provide an offset to weaker construction spending.

Currently, Caterpillar shares are trading at 6.7x our 2009 earnings estimate of $5.48 per share, which is at a premium to the industry median multiple. Applying a P/E multiple of approximately 6.9x to our 2009 EPS estimate of $5.48, we derive a target price of $38.00 per share for CAT, which leaves shareholders with an estimated total return of about 7.4% (including dividends) from the current price.

Read the full analyst report on CAT