Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Pastimes : The Naked Truth - Big Kahuna a Myth -- Ignore unavailable to you. Want to Upgrade?

To: Defrocked who wrote (68472)	10/13/1999 10:27:00 AM
From: MythMan	Respond to of 86076

>>Estimates for Caterpillar are not exactly robust. Consensus estimates are for $0.61 per share, which is down 34% from the same quarter last year. The estimates for fiscal year 1999 (ending in December) are for $3.03 per share compared to $4.10 in 1998. Fiscal year 2000 also looks anemic with estimated EPS of $3.80. Even 1998's $4.10 in profits trailed 1997, when earnings were a far more palatable $4.37 per share. Despite this decline in earnings and no particular growth spurts projected, Caterpillar is selling for rather close to its high in 1997 and 1998. Therefore, it is selling for a higher multiple of those earnings. Back in 1997, with the company earning $4.37 per share and the stock selling in the high 50s, the price-to-earnings ratio (P/E) was around 13 (e.g., 58/4.37 = 13). Today, with trailing 12-month earnings (TTM -- earnings for the four most recent quarters) of $3.10 and a price of $58, the P/E is around 19. So why are investors willing to pay more today for a dollar of Caterpillar's earnings than they were willing to pay last year or two years ago? Good question. I don't know the answer, but if I had to speculate, I would blame it on two things: P/E Inflation and the Dow Effect. P/E Inflation is another term for an "overvalued" market, if you buy into that idea. Stocks in general sell for more today, relative to their earnings, than at just about any time in the past. For an interesting take on that, see Dow 36,000? The Dow Effect is my spur-of-the-moment theory stolen mostly from our general Foolish Four explanation. Caterpillar is a Dow stock, a major global player. Even if earnings are down at the moment and prospects aren't bright, I think investors are starting to realize that a company like this isn't likely to be "out" permanently. As the global economy recovers from last year's slump, Caterpillar is bound to share in that recovery. So even someone who isn't following a Dow Investing-type strategy might find the company attractive as a long-term investment, especially investors who might be getting a bit concerned with all those stocks that are selling for 100 times earnings -- if they even have earnings. A company that makes bulldozers and tractors is nothing if not down to earth. Got a better theory? Share it with us.<< ho ho ho fool.com