Playing the Expectation Game

 | Jul 24, 2013 | 11:24 AM EDT
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Usually the expectation game is not as starkly portrayed as it is today, with the positive reaction to Apple's (AAPL) numbers and the negative reaction to Caterpillar's (CAT) earnings.

In the last month, we have seen a relentless cutting of earnings estimates for Apple. You could watch the consensus drop furiously lower as so many analysts trimmed expectations one after another. In the end, they were tripping over themselves trying to get to where they had an estimate of $7 -- a race to the bottom, so to speak.

We didn't get there as Apple ended up reporting $7.47, which, amazingly exceeded the earnings estimates but only because of the inexorable chopping that went on.

Caterpillar was the opposite. It's been so relentlessly bullish in the face of such obvious headwinds that it is painful to read the release or listen to the CEO suddenly talk about the multiyear need for more equipment because of the expansion of the world's multitudes. Caterpillar routinely told you how the supercycle of commodities is driving business higher and, at times, you heard lots of chatter that one day in this particularly era CAT could do $12 a share. Now you have to hope, if you own it, it can do half of that.

Worse, CAT put its money where its mouth is and made what was perhaps the single-most disastrous acquisition of the era, the purchase of Siwei, a Chinese mining company, for $653 million, a purchase that had to be written down by $580 million a year after its completion.

That monstrously horrible acquisition comes just a couple of years after the company bought Bucyrus International, another mining equipment play, for $7.6 billion, a purchase price that now looks incredibly generous, if not ludicrous, given where that company's biggest competitor, the very superior Joy Global (JOY), now trades.

This unmitigated, I would say, reckless, optimism is what's fueling the decline today as the company seems downright stumped by the capital expenditure decline that hit them on so many fronts. That said, it isn't as if CAT analysts were in front of this one, either, which is why you didn't have the Apple effect here. You just had pure disappointment.

Here's some irony. I genuinely believe that if CAT hadn't been as bullish in the last few years, you could have seen it earning $6 this year with a higher price as people say, OK, maybe things are going to get better in Europe given the better PMI numbers this morning and rebounding U.S. construction. Of course, that would have meant CAT never doubled down on equipment that was clearly meant for the Chinese boom that is now a potential bust given the decline in that nation's fortunes. Yes, China might be able to grow at 7.5% this year, although I now believe that is a stretch. The more important issue, though, is that CAT made deals and built inventory that was probably meant for 9% to 10% growth and the acquisition of what is now considered by many to be a fraudulent company has called into question management's ability to be rigorous at all, let alone too optimistic.

In the end, both companies are the cream of the crop when it comes to making products. Both represent the best engineering. Both have superior products. Yet both are fighting what now looks like a glut of equipment. Apple's in better shape to handle this because even though it didn't see the slowdown coming -- and still doesn't -- the expectations were so low that there was no way the company's stock could get killed.

Caterpillar? I suspect it can continue to trade lower as analysts at last do what they were doing to Apple for months now: trim estimates. Hence, the difference in trajectories of these two fine companies.

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