Caterpillar wriggles

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A caterpillar hitting the ground running would be an impressive sight. But that is exactly what the biggest maker of bulldozers says it wants to do when global growth picks up again. That raises two questions. The first is exactly when Caterpillar’s management thinks a recovery will begin. Second is whether being primed for the first signs of growth means the company is late cutting costs if the downturn lasts longer than expected. The answers to both were revealed at Caterpillar’s third-quarter results yesterday. (Given the group’s sensitivity to everything from mining to construction, the presentation sounded more like a lecture by the International Monetary Fund.) Caterpillar expects world economic growth to fall to less than 2.5 per cent in 2009 from 3.8 per cent last year, with emerging countries contributing more and the developed world less. Still, demand is expected to pick up again towards the end of next year.

Surely that rules out pushing the nuclear cost-cutting button now. In addition, Caterpillar believes the dramatic fall in commodity prices will not hurt sales to mining companies. It is true that there is an order backlog for large trucks, for example. But Caterpillar is wrong to be optimistic just because miners were investing at even lower commodity prices before. Sure, it pays for many producers to keep spending, but just as rising input costs caused Caterpillar’s own net profits to fall 6.4 per cent year on year, many miners are now operating at prices below their marginal costs. When that happens for long, capital expenditure plans are trashed. Caterpillar’s share price has halved since April, trading on 6.5 times forward earnings. That is a fair bet for investors who back management to deliver flat sales for next year. But if the recession lasts longer than hoped, or commodity prices continue to fall, Caterpillar may have dug itself into a hole.

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