By Mike Caggeso
When Caterpillar Inc. (CAT) reported its third-quarter financial results earlier this month, the heavy-equipment giant was able to report record sales and profits – despite an 11% plunge in its U.S. revenue.
Its knight in black-and-yellow armor: Soaring overseas sales.
"The industries we serve are becoming increasingly global, and the investments we are making to achieve our 2010 goals have us well positioned to meet their needs," Jim Owens, Cat's chairman and chief executive officer, said of the company's third-quarter performance.
Indeed, while U.S. sales dropped 11% (a decline of $615 million), every one of Cat's overseas divisions posted remarkable gains: Sales were up 36% in its Europe/Africa/Middle East unit (gaining $963 million), 30% in Latin America (adding $191 million) and 30% in the Asia/Pacific group (growing by $386 million). Caterpillar's ability to distance itself from the fraying U.S. market was the only reason it posted record third-quarter results.
And yet, the Peoria, Ill.-based Cat still had to cut its earnings outlook for the rest of the year – citing the U.S. economic malaise as the reason.
During a third quarter in which the American economy was slowing, U.S.-based firms had to deal with such challenges as an imploding housing market, soaring energy and commodity prices, the collapse of the subprime mortgage market and an ensuing global credit crisis, and a threadbare greenback that's fallen to lows not seen in 30 years.
Each of those factors attacked U.S. companies from a different angle, causing industry-wide problems competitors shared. A look into each industry shows how some of the companies that were first to report their quarterly numbers have fared – and how they are positioning themselves against the stormy weather they'll face in the current quarter and in others to come.
A Dour Outlook for Financial Services
Banks and securities firms took a beating in the third quarter, and all indicators point to the credit crunch they created as the cause. It's no surprise that more than 130,000 workers had already been terminated from companies in this sector through the end of September, making this year the worst ever for layoffs in the U.S. banking-and-brokerage firms.
Countrywide Financial Corp. (CFC) was the financial sector's poster child of pain caused by the woeful credit market. Its quarterly earnings report capped off a three-month streak of bad news. During the quarter Countrywide:
- Announced the departure of 10,000 to 12,000 employees.
- Received a $2 billion capital injection from Bank of America Corp. (BAC).
- Watched one of its largest shareholders, AXA SA (AXA), cut its company stake from 11% to 4.1%.
- Was investigated by the Securities and Exchange Commission (SEC) about Chief Executive Angelo Mozilo's conspicuous stock sales before the mortgage bubble burst in July.
Countrywide recently reported a third-quarter loss of $1.2 billion (or $2.12 a share), compared to a profit of $647.6 million (or $1.03 a share) for the comparable quarter last year. It marked the company's first quarterly loss in 25 years.
Mozilo, one of those CEO's who's never been one to hold his tongue, said this year's housing market was the worst since the Great Depression, but emphasized that the company was positioned to return to profitability in the fourth quarter.
[On Monday, however, Mozilo and KB Home CEO Jeffrey Mezgerfor the U.S. housing market. The two executives were part of a panel discussion on the economic impact of the subprime mortgage meltdown that was sponsored by the Milken Institute].
Other lenders have experienced woeful quarters of their own during the third quarter. While Countrywide posted an actual loss, a number of top financial-services companies recorded massive declines in profit. For instance, profits declined:
- 57% at Citigroup Inc. (C).
- 61% at The Bear Stearns Cos. Inc. (BSC).
- 17% at Morgan Stanley (MS).
- And 10% at Wachovia Corp. (WB).
These big profit declines – coupled with the massive layoff figures – haunted pre-market headlines, and the ensuing doom and gloom weighed on day trading and further propagated the problem. Many consider the credit market the economy's bellwether because it gauges how much money we can spend. Defaulting loans means borrowers have less money, and banks, in turn, go bust.
Really, the only good news to come out of this sector in the third quarter was the surprise 79% profit by Goldman Sachs Group Inc., (GS), the largest U.S. securities firm by market capitalization. Not only was it the company's second-highest revenue figure ever, it was achieved in the face of this summer's severe market turbulence.
But even Goldman Sachs has some investors worried [For a report analyzing a new accounting regulation that could force firms such as Goldman to take additional write-offs, please click here. The report is free of charge].
Lenders aren't anticipating sunny times anytime soon. The housing market may not turn completely around until 2010, by some estimates, a dour reality that will certainly restrict consumer spending. Continued subprime defaults, coupled with the fallout from mortgage "resets," will spill into the broader credit markets and force interest rates up – boosting borrowing costs and squeezing corporate profits. That, in turn, could slash corporate spending and even bring about a serious slowdown in mergers and acquisitions. Corporate profits, business spending and M&A deals have been major factors in the advance of the major market indices over the past year; a decline here, coupled with a housing-market-spawned reduction in consumer spending could combine to spell problems for stock prices.
Some speculate emerging markets and their rising middle classes as potential saviors. Others see the share-price escalations in some of those markets – especially China – as the world's next financial bubble.
Third-Quarter Food-Sector Follies
Surges in the prices of food-related commodities, including wheat, , coffee and dairy, have punished virtually every link in the food chain – the food-manufacturing chain, that is. Consumers, farmers and manufacturers are all feeling the pinch. Needless to say, earnings were affected.
Milk prices creamed Hershey Co. (HSY), which saw third-quarter profits drop 66%. The snack food and chocolate candy maker also forecasted declines in full-year set sales and diluted earnings per share.
On the surface, London-based candy and beverage maker Cadbury Schweppes (CSG) posted solid year-over-year revenue growth of 10% for the third quarter, but some analysts think the company will have trouble breaking into the emerging markets, slowing its long-term growth rates. In the near term, thanks to high corn prices and its reliance on corn syrups to sweeten its drinks – Dr. Pepper, 7-Up, Hawaiian Punch, Canada Dry and Snapple – Hershey will experience additional profit pressures.
Rivaling beverage makers Coca-Cola Co. (KO) and PepsiCo Inc. (PEP) are simultaneously battling corn prices, and each other, in a bid to serve China's collective sweet tooth. Neither can claim victory, yet, but the battle yielded terrific third-quarter profit growth for each – 13% for Coca-Cola and 17% for Pepsi. Both companies benefited heavily from rocketing sales in their international markets.
Likewise, the food companies with a heavy international presence were the ones that have so far posted the biggest profit gains. McDonald's Corp. (MCD) credited its growth in Asia for its 27% gain in profit. Similarly, Yum! Brands Inc. (YUM) posted an overall profit gain of 17% – thanks to massive growth in China, but no thanks to U.S. consumers still scared by a Taco Bell e-coli outbreak.
Boeing Soars, Throttles Back Expectations
Caterpillar wasn't the only exporter of big-ticket wares that posted mixed earnings. The Boeing Co. (BA), the world's second-largest producer of commercial airliners, said profits climbed 61% in the third quarter, its best showing in four years.
The results smashed forecasts, but the company doused any exuberance by cutting its 2008 revenue estimates because of delays in launching its new Boeing 787 Dreamliner.
However, Boeing this week said its board of directors approved a new plan to buy back up to $7 billion of the company's common stock. The company has repurchased approximately $8 billion of common stock since resuming its stock-buyback program in 2004. The Boeing board last authorized buybacks in August 2006, when it announced plans to repurchase $3 billion worth of shares. That buyback plan is almost finished, Boeing said this week.
The share repurchases will be made on the open market, or in privately negotiated transactions, and the company said the number of shares purchased, as well as the timing of any buybacks, will depend on corporate cash balances, business, and economic conditions, and other factors, including investment opportunities.
Boeing's directors also declared a regular quarterly dividend of 35 cents a share. That dividend is payable Dec. 7 to shareholders of record as of Nov. 9, the company said.
The High-Tech Haven
Apple reported a 67% increase in profits ($904 million net profit) for its fiscal fourth quarter. Interestingly, while the Apple iPhone has been a near-ubiquitous news story, it's the publicity about the phone has helped boost sales of Apple's computers and iPod music players that's turned out to be the real story. Although Apple sold 1.1 million iPhones during the quarter, they only generated $118 million in revenue – sales of computers and iPods accounted for the bulk of the company's growth.
Microsoft stole Apple's thunder just a few days later when it announced that its quarterly sales results crushed analyst forecasts, coming in more than $1 billion over projections. The catalysts: Microsoft's Vista software and its immensely popular "Halo 3" video game for the company's Xbox 360. Profit soared 23% ($4.29 billion), while sales advanced 27% ($13.8 billion).
The results sent Microsoft's shares to a six-year high the day they were released.
Retailers Revise Forecasts
Target reported an 11.6% sales increase in August and a 6.2% increase in September. The latter was below guidance.
Archrival Wal-Mart reported 9.3% sales increase in August (not surprisingly, the results included a 15.1% increase at Wal-Mart International stores), and a 9.7%-sales increase in September (including a 20.1% increase at Wal-Mart International stores). And though Wal-Mart moderately increased its quarterly earnings guidance, the retailer shared Target's reasons for lower-than-expected sales.
"Overall, apparel and home remain soft," Wal-Mart said about its September sales statistics. "Company research reinforces that customers remain concerned about their finances, especially the cost of living… In addition, unseasonably warmer weather in much of the country, coupled with tighter consumer spending, negatively impacted key seasonal categories."
Wal-Mart is combating customer concern about the U.S. economy with a new, empathetic slogan: "Save Money. Live Better."
While the outlook may be a bit on the sluggish side for Wal-Mart and Target, it appears that real trouble looms for The Home Depot Inc. (HD), which plans on reducing outstanding shares by 165 million and 290 million, respectively, in the third and fourth quarters. In the third quarter, while the company stock's plunged 6.91 points (or 17.56%), it sold its HD Supply unit.
Commenting on the company's second-quarter financial performance – which included a 15% decline in profits – Chairman and CEO Frank Blake said that "housing and home improvement markets will remain soft into 2008 … we will continue to invest thoughtfully for the long-term health of the business."
Investing For Profit in the U.S. Market
Although a key Money Morning mantra has been "go global, or get left behind," investors will clearly also want to invest in some U.S.-based companies. Our panel of investing experts says the best bets are companies that are major exporters, or that do a major slice of their business overseas.
Companies that meet those qualifications, have been covered by Money Morning, and warrant additional research by investors include:
- Yum! Brands Inc. (YUM).
- PepsiCo Inc. (PEP)
- The Coca-Cola Co. (KO)
- MGM Mirage (MGM)
- McDonald's Corp. (MCD)
- The Boeing Co. (BA)
- General Electric Co. (GE).
- Berkshire Hathaway Inc. (BRK.A, BRK.B).
A number of Money Morning News stories and research reports on these firms are listed below. You'll also find our searchable news archive to be a useful tool in your research, as you lookup up some of our past coverage.
The Staff of Money Morning
News and Related Story Links:
Goldman Profit Surges Despite Summer Turmoil.
Money Morning News Analysis:
Layoffs Hit an All-Time High in the Financial Services Sector.
San Jose Mercury News:
Countrywide CEO Says More Trouble Ahead for Housing Market.
Money Morning Investment Analysis:
The Second Quarter Votes are in: Global Gains Trump Domestic Pains.
Money Morning News:
Wm Wrigley Capitalizing on Innovation, Global Reach.
Money Morning Investment Research Report:
The Three Pathways to Profit as Investors Make it All About Earnings.
Money Morning Investment Research Report:
How to Profit on an Earnings Surprise From China's Rise.
Money Morning Investment Research Report:
Could Goldman Sachs Explode? How to Dodge the Ongoing Mortgage Mess.
Cadbury Schweppes: What Now?
Money Morning News Analysis:
Coca-Cola's Big Third Quarter Highlights its Rivalry with Pepsi.
Coca-Cola Net Beats Estimates on Asia, Latin America.
Weak US ethanol profits could lead to more delays.
- Money Morning:
Pepsi 'Goes Red' in China.
Pepsi Steps Into Coke Realm: Red, China.
Video TV Ad:
A Pepsi Ad for its China Olympics Campaign, Featuring the Change From Blue to 'Red.'
Pepsi's Stellar 3Q Gains Fueled By International Growth and Falling Dollar.
Money Morning Investing Research Report:
Eleven Ways to Profit From the Falling U.S. Dollar.
- Trading Markets.com:
Money Morning News Analysis:
Home Depot is Latest Victim of U.S. Housing Slump.