Caterpillar Slinking Slowly

Caterpillar Inc. (CAT) 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. Caterpillar 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, Caterpillar Inc. 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.

Unfortunately for Caterpillar, sales volume and pricing failed to cover the higher operating costs. As a result, third quarter machine and engine (operating) margins declined 240 basis points to 8.9%. We see a slight bump in operating costs for the fourth quarter, but lower material costs for the full year 2009. The weaker global economy should keep a lid on input costs.

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