“Back in the Day,” Part II

Jeff Matthews has an entertaining and well-written commentary on conference calls, guidance, and forward looking statements.  It is always fun to pick out predictions that later look foolish.  The more predictions that someone makes, the easier it is to find an error.  The question is whether Jeff’s analysis of a homebuilder has any relevance for CAT.  Take a look at his story:

Link: “Back in the Day,” Part II.

"What that means for investors is a very consistent, highly margined, very predictable cash-flow stream," Glenn Christenson, chief financial officer, said in an interview. "We’ve been able to give guidance all the way out to 2007."

While this is an entertaining story, it has little to do with the prospects for Caterpillar.  (full disclosure– I have a double on this in both institutional and individual accounts and I still love it.)  The investment community seems to have difficulty in parsing corporate statements.  They are all fighting the last war, the pre-2001 environment.

I first noted the change in 2002-03 when CEO’s were interviewed on CNBC.  They were all very conservative in forecasts, especially before the Iraq war.  CEO’s frankly stated that they were delaying major investments in capital equipment.  They were hiring consultants instead of full-time employees.  They were staying flexible in case things worked out badly.

This behavior had a powerful effect on the economic recovery.  It delayed the business investment, distorted the payroll numbers versus the employment survey of individuals.  As I predicted to my clients at the time, it led to a record-breaking streak of corporate earnings growth and stronger balance sheets.

It is also stretching out this recovery cycle.  Those who use the weak methodology of taking average cycle length and trying to guess the peak on that basis will be wrong.

A major difference is that in the post Sarbannes-Oxley era, corporate leaders are very cautious in their guidance.  CAT executives say that they are mid-way through a seven or eight year cycle.  Their highly diversified global business is great.

Analysts covering the stock have been predicting a top for two years now while simultaneously claiming that CAT cannot pass on any cost increases.  Meanwhile, the earnings push to record levels, overseas business expands, truck engines are in great demand, energy construction is booming, post-Katrina demand is great, and the company has labor costs under control.

At some point the rookie hedge fund traders and pundits will realize that both corporate executives and sell-side analysts are much more conservative than they were in 2000.