Durable Goods, Household Employment and Caterpillar

• Posted by ToddSullivan
• on July 26th, 2012

“Davidson” submits:

The Advance Report on Durable Goods Orders came in this morning with a sharp rise to $221.6Bil or up 1.6%. The pattern of Durable Goods Orders vs. the Household Survey Employment series is shown in the chart below. This morning’s Advance Durable Goods report can be found at the link: Advance Report on Durable Goods (June 2012).pdf

As I have discussed many times, month-to-month economic data is always volatile due to the limits of statistical data collection. This data shows that the US economy remains in a strong uptrend and that employment should continue to rise in the coming 6mos-12mos. Note: This single report is very consistent with other key economic data and must always be viewed as part of the whole.

I find it impossible to agree with the pessimistic views so overwhelmingly proffered in the media. The ONLY direction I can see in this data is one of economic expansion.

$CAT, Oberhelman and $XOM ’s Tillerson which do well when global economies are expanding each report that they continue to invest in their respective businesses to meet expected future demand.

It is very hard to be pessimistic when the actual “nuts and bolts” of the global economy are expanding!

Regarding Caterpillar:

$CAT released earnings and had a conf call yest.

First, business is good and expected to continue. This flies in the face of those fearing recession as CAT’s business truly reflects the basics of global economic trends. CAT implemented “Lean” mfg techniques in 2005. Mike DeWalt told me 2yrs ago that getting north of 28% Gross Margins was what I should see them do. They are now over 27% and climbing. Today’s release indicated 15% OpMargins when previous levels were in the upper single digits with highs at 12% at previous economic tops. You can justify improvement in the BV/Shr growth rate in the chart below.

If this continues to improve and we remain at 4xBV (currently 3.6xBV) then the stock should trade close to $160shr-180shr in 4yrs-5yrs respectively. Pricing as I discussed with you is dependent on market psychology and the best I can do is a very rough estimate.

Not only does $CAT results confirm the view that the global economy is expanding and that the overly pessimistic media recession pronouncements misplaced this report adds confirmation to $CAT ’s “Lean” implementation is adding to CAT’s Total Return for shareholders.

This is an issue which I recommend.

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