Local folks may want to read this article in today's WSJ. "For investors in the sector, '09 is a largely done deal. The message alongside first quarter results was that of hunkering down with cost cuts to cope with weak demand.
The issue is duration. Take Caterpillar. Reduced '09 earnings-per-share projections of $1.25 imply a price/earnings multiple of 27 times. Investors are clearly looking through the trough: After all, not so long ago the company was earning more than $5 a share.
For 2010, the consensus forecast implies a multiple of 21 time. But look at the range: The highest estimate, according to Thomson Reuters, is 8 time the lowest.
With the outlook so foggy, why pay so much for Caterpillar on a 2-year deal? Caterpillar did well from a construction boom in the U.S and Middle East that isn't coming back soon. U.S. shipments of steel for construction and contractor's products fell 58% in the first 2 months of '09.
Chinese infrastructure offers some hope. But brokerage Stern Agee estimates all of Asia accounts for only 15% of Caterpillar's sales. And with China a buzzword of all competing companies seeking growth, it's questionable how high margins on such business will be."
The article goes on to say corporate executives are still cutting capacity and leaving question marks hanging over dividends. "Investor should take their cue from that."
Some are. We believe we can buy the stock back in the mid twenty range before 2011.
We will see.