Ahead of Wall Street - October 22, 2012

Monday, October 22, 2012

“Production across much of the company has been lowered, resulting in temporary shutdowns and layoffs. Lower production will continue until inventories and dealer order rates move back in line with dealer deliveries to end users. The reduction in the profit outlook is in line with the lower sales and revenues outlook, partially offset by the gain on the sale of a majority interest in our third party logistics business.”

This is a direct quote from Caterpillar’s ( CAT - Analyst Report ) earnings press release this morning as the company beat third quarter earnings estimates, but came a tad bit shy of revenue expectations. Importantly, the mining and construction equipment maker guided lower, citing economic reasons.

Caterpillar has been for a long time a direct play on the global economic growth story, particularly the part centered on China and the other emerging markets. But that narrative seems to have lost some of its luster lately, as China struggles to stabilize its economic growth profile. As a result, not just Caterpillar, but marquee names in different industries had to re-set expectations, as saw with Yum Brands ( YUM - Analyst Report ) , FedEx ( FDX - Analyst Report ) , and Nike ( NKE - Analyst Report ) .

Many believe that the worst may be behind China and the country may be on track for steadier growth from 2013 onwards. But it’s far from clear at this stage whether the big infrastructure type spending by the Chinese government, a key driver for players like Caterpillar, will come back in sufficient volume to put them back in the limelight.

Given the barrage of third quarter earnings reports coming out this week, we will likely see more management teams describe business conditions as Caterpillar did this morning and some of the others did in recent days. With more than 150 S&P 500 companies reporting results this week, we will cross the halfway mark by the end of this week. Results have been less than inspiring thus far, with the Tech sector particularly off-color. It will be interesting to see if Apple ( AAPL - Analyst Report ) , which alone accounts for one-fifth of the sector’s earnings, will buck the trend or add to the sector’s woes. We will have to wait till Thursday after the close to find out.

Sheraz Mian
Director of Research