“Who are you gonna believe, me or your own lying eyes” Groucho Marx
From Bloomberg on October 23, 2014:
Caterpillar Climbs After Raising Forecast on Construction
“Caterpillar Inc., the largest construction-equipment maker, climbed the most in more than eight months after topping analysts’ profit estimates for the third quarter and raising its full-year earnings forecast.”
Fast forward three months.
Yesterday, Caterpillar reported fourth quarter results that disappointed Wall Street. The company lowered its forecast for 2015 on the back of falling oil prices. CEO Doug Oberhelman said “The recent dramatic decline in the price of oil is the most significant reason for the year-to-year decline in our sales and revenues outlook.” Caterpillar shares were down 7.2% yesterday.
What is the takeaway here? First, Mr. Oberhelman should get out of the forecasting business. His crystal ball is no better than the rest of ours, but unfortunately for CAT shareholders, the analysts who follow the company take Mr. Oberhelman’s forecasts as gospel. This creates unnecessary volatility in the share price.
In October of last year all of the available evidence (sliding commodities prices, slowing global growth, a strengthening dollar) suggested CAT’s outlook was worsening, but when Oberhelman said otherwise, CAT shares jumped 5%. Until yesterday, when Oberhleman had to cut CAT’s forecast which knocked the shares down 7%.
The second takeaway for you is that management guidance should be taken with a heavy grain of salt. Management rarely gives investors a candid assessment of their business until they have exhausted all other options.
Jeremy Jones, CFA
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