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Why Caterpillar's Strength Doesn't Foretell a Housing Rebound

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Worldwide exposure helps the construction equipment maker.

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There are bull markets and bear markets, but do we now have a schizophrenic market?

Caterpillar (CAT), the world's largest maker of construction equipment, offered an upbeat earnings outlook Tuesday -- but earlier, the National Association of Home Builders/Wells Fargo Housing Market Index slipped one point to 18, well below any number over 50, which indicates a positive sales outlook.

This isn't nuts. Here's why: Caterpillar slashed costs and inventory during the recession and is poised for the rebound it believes is underway and will strengthen in 2010. Unlike US home builders, Caterpillar is a diversified, worldwide company. It's not bound to the housing industry and is active in heavy construction, farming, mining, and logging. The company also makes diesel engines, industrial gas turbines, and electrical power generation systems.

Caterpillar's third-quarter earnings beat analysts' estimates and its full-year earnings forecast topped earlier forecasts.

Still, the company's net income fell by 53% to $404 million, or $0.64 a share, from $868 million, or $1.39 for the same period a year ago. But analysts expected the company to earn just $0.05 a share. Sales declined 44% to $7.3 billion from $13 billion. Caterpillar expects to earn between $1.85 to $2.05 a share for 2009, beating analysts' average estimate of $1.48 and exceeding even the highest estimate of $1.75.

In early trading Tuesday, Caterpillar's stock jumped by nearly 2%.

Meanwhile, the National Association of Home Builders says the expiration of the $8,000 home-buyer tax credit on November 30, continued high unemployment, foreclosures, and a backlog of new houses will combine to drag down new home construction. The organization sees no immediate turnaround in new home construction, but notes that a possible extension of the tax credit and expanding eligibility beyond first-time buyers could boost sales.

Maybe. But with consumers cutting back on what many see as a weak holiday shopping season, it's hard to imagine that a tax credit would encourage significant home buying, even if mortgages were again widely available. In any case, the downbeat housing outlook means no immediate miracles for home builders, including Lennar (LEN), D.R. Horton (DHI), KB Home (KBH), and Pulte Homes (PHM).

US home builders started fewer new houses in September than expected and building permits fell, indicating a slower market ahead. Housing starts increased 0.5% to an annual rate of 590,000 from 587,000 in August. Analysts expected new home starts would increase to a 610,000 annual rate in September. Building permits fell 1.2% to a 573,000 annual rate last month.
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No positions in stocks mentioned.
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