1 Dow Stock That Could Blow You Over Next Week

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With the fiscal cliff tossed off, many companies whose fates hang heavily on the economy’s health are keeping their fingers crossed for a good year. All eyes will be on one such Dow stock as it rings the earnings bell on Jan. 28 -- Caterpillar (NYSE: CAT). Hopes from the largest construction-equipment maker are high, especially after General Electric’s (NYSE: GE) surprise earnings beat and optimistic outlook about some key markets. But all’s not well.

For once, Caterpillar might break its own history of trampling Street estimates as the company has just revealed something which doesn’t sound good, and which will hit its fourth-quarter earnings hard.

Bolt from the blue

Caterpillar has just “uncovered deliberate, multi-year, coordinated accounting misconduct concealed” at its recently acquired company in China, ERA Mining Machinery. In simpler terms, the company will have to bear around $580 million additional charges during its fourth quarter which will dent its EPS by $0.87.  This is certainly bad news for a quarter that was anyway touted to be a weak one.

At the beginning of the fourth quarter, Caterpillar’s action plans included lowering production and reducing inventory, which in turn would mean lower sales volumes. After a record-breaking third quarter, get ready for some heartbreak.

Air's clear, though

Yet, on an adjusted basis, Caterpillar still has fair chances of surpassing downbeat analyst estimates. More importantly, full-year numbers should matter more, where Cat is set to hit another record. Sales at projected $66 billion would mean a 10% upside and EPS at the lower end of $9 would translate into 21% gains, both over 2011 record highs. Note that the forecast of $9 EPS didn’t include the extra fourth-quarter charges discussed earlier.

Caterpillar is a smart company, and has very Foolishly already answered some questions that would irk any investor after the ERA accounting fraud report. One, Caterpillar doesn’t expect the issue to have any “significant impact on 2013 sales and revenues or profit.” Two, and more important, the case will not change Cat’s ambitious growth plans or strategy outlined for the Middle Kingdom. In fact, Cat has just opened two new facilities in China.

Signals getting stronger

GE too had a pretty good report card for China, witnessing some good movement in the nation. Its industrial revenue climbed 9% this past quarter driven by decent growth in developing markets including China and South East Asia. GE’s words matter because it is foraying deeper into the mining business and is shelling out big in China, very much like Caterpillar. Also, 25% of Cat’s revenue comes from the Asia-Pacific region alone. Even better was what Alcoa (NYSE: AA) had to say about China as it stunned the Street with great numbers and solid outlook some days back – it is witnessing healthy growth in the nation and expects China’s GDP to grow over 8% this year. Alcoa also expects an uptick in the North America commercial construction market which should bode well for construction-equipment king Caterpillar.

As I write this, UK stock markets are bouncing back strongly buoyed by fresh interest in mining stocks, which includes the world’s second-largest mining company Rio Tinto (NYSE: RIO). Rio feels China has already crossed the worst slowdown hurdle, and should only get better from here. Rio reported record iron ore shipments for 2012 and 4% higher production compared to 2011. The company is even betting billions of dollars in markets like Australia and plans to increase capacity by 50% over the next few years. Naturally, this should be music to Caterpillar’s ears which sells mining equipment.

Fingers crossed

GE’s optimism regarding developing markets and Alcoa’s improved projections for China are clear signs of recovery and hope. Caterpillar was pessimistic enough to spell out guidance through 2015, but it might soon need to eat up its own words. As of now, Cat expects higher sales for its construction industries division, but lower revenue for resource industries (mining) business for 2013. It forecasted a range of +5% to -5% for its 2013 sales from 2012 levels. But who knows, if major mining markets and miners come off lows sooner than expected, Cat might just leap back in action. GE, Alcoa, and Rio have already hinted so. Will Caterpillar follow suit?

To know, simply add Caterpillar to your stock watchlist to get quick analysis reports as and when the bellwether reports numbers next week. Click here to add it.

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Neha Chamaria has no position in any stocks mentioned.Nehams has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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