Ask Neubert: Economics, Emerging Markets and Caterpillar

I recently received an email from a regular Kapitall user, with some very timely questions.  Here's his original message, along with my response. 

WILLIAM C. asks:

I believe that our sub par "recovery" is tied to high levels of uncertainty stemming from the future of questionable administrative policies and a housing market that is still floundering, and probably will be for some time. And now, the Fed is going to implement another round of quantitative easing and want to raise it target for inflation. It doesn't make sense to me for the Fed to try and spur growth by injecting more capital and lowering interest rates even further. Banks are already sitting on tremendous capital reserves, so I don't think further increasing of the money supply will be beneficial. Ultimately I don't see any real recovery within the next two years. What are your thoughts?

As for Caterpillar (CAT ), I think it's interesting that it is trading at pre-recession prices. You've said its price moves with the economy, so might this be an indicator that the economy is improving? Their earnings aren't where they were in 2007, but they are increasing, and they haven't cut their dividends. Do you think they have lowered operating cost by reducing the number of employees? Also, do you believe there are large growth opportunities for companies like caterpillar in developing economies where there is a strong demand for infrastructure improvements? Any other thoughts explaining CAT's current market price?

Thanks for you thoughts,

A Devoted Kapitallist

Dear Devoted Kapitallist,

Thanks for your K-Mail--you've included a lot of great information to support your opinions.  Here's my take on what your views and ideas mean specifically for Caterpillar, and whether or not I agree with your conclusion.   

1) Negative view of US economy B
Simply put: bad for CAT . However, I'm not as negative on US economy as you are.

2) Banks are sitting on huge capital reserves
This is good for lending.  All that extra cash earning zero will start to burn a hole in banks' pockets--they'll have to lend it to someone at 4-7%.  If they don't they'll have to downsize reduce CEO pay and nobody working there wants that.  In a nutshell: good for Caterpillar.

3) High Valuation
You suggest that CAT may have cut costs.  But analysts would know if they had,  and that effect would be included in their forward earnings estimates.  That 17 you see at the top of CAT's Playground icon is their forward earnings estimate, aka "POP" in Kapitall lingo.  Long story short, high valuation = bad for CAT.

4) Big Opportunity in Emerging Markets
Of CAT's $90 billion in 2009 sales, about $26 billion (26%) came from Asia and Latin America--percentage-wise, not actually that much.  Since the rest of their sales are from Europe and the US, I'd say those economies still matter most.
Meaning emerging market growth is not very important for CAT.

5)Trading at Pre-Recession Prices
You'd almost think we weren't even in a recession.  Chalk this up to the fact that markets aren't perfect.  For all we know, it could have a high weighting in an index fund--and those guys don't care what they pay.  

And in case you're wondering, how the heck did I find all that info on regional sales? 

I used the Kapitall Analysis Tool.  Just open go to the "filings page," open 10K and search the PDF for "regional sales".  I know this is complicated and you might not know (or care) what all those letters mean, but this data can come in handy.

(LINK)

DISCLOSURE:

I do not own Caterpillar.   I do not plan on doing construction on my house that would require a back hoe in the next 15 months.

DISCLOSURE:

This is not investment advice--always do your own research.  The opinions of David Neubert do not necessarily reflect those of Kapitall.