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What next for Apple and Caterpillar?

The gross margin decline guidance is another data point, though this is typical Apple beat/raise communications strategy for the New Year. Au contraire, as global economies of scale kick in on the iPhone5, next gen iPad, iPad Mini and Mac Notebook new product launches, gross margins will head back above 40 per cent.

The revenue and EPS misses were just below the Street whisper number grapevine, the reason Apple was a short last week. I will definitely not bottom fish in Apple at 610. I have no problem with Apple’s stellar prospects in 2013 but I believe that risk premia on Wall Street will rise due to the US election/fiscal cliff policy uncertainties. This means Apple can easily fall to its 200 day moving average at 582-585, a scenario I had outlined in a column on the most valuable tech bellwether on Nasdaq two weeks ago. The Apple result only reinforces my bullishness for Samsung, its only real rival in the global smartphone markets (90 per cent blowout Q3 rise thanks to Galaxy). South Korea’s Kospi index and Samsung are among the world’s deep value bargains at 1,850 and 1.2 million won.

The plunge in Caterpillar’s share price from 112 to 83 now echoes the growth angst in the global economy, as sales of construction and mining equipment fall to their lowest levels in three years. There is no reason to believe that revenue growth or EPS will not fall again in the next twelve months so it is premature to bottom fish in Cat, particularly as the mining backlog is only going to get worse even though the American construction market has finally pepped up from its five year Rip Van Winkle torpor. Nor is the growth angst limited to Europe and China. Cat orders have fallen even in most major emerging market. It is no longer possible for Cat to earn $10 in 2013. A far more realistic range will be $8-$9 as the inventory cycle in mining equipment take its brutal toll on the bottom line.

Stock markets extrapolate trends and discount the future. So Caterpillar, at 12 times earnings, trades at the lower end of its historic valuation range. The key variable is EPS for next year and I expect the Street sell side analyst estimates will, as usual, be revised lower en masse. If EPS falls to the worst case scenario of $8 and the global economy weakens beyond current consensus, there is no reason Caterpillar valuations cannot fall as low as eight times forward earnings. This means a credible bottom in the shares is somewhere in the region of 68-72. China oil and gas capex, inventory correction and mining equipment sales are the three variables it is mission critical to track. I expect Cat will bottom at 68-70 in this global cycle. Upside will only be in the second half, when the Chinese growth reaccelerates. So I expect the Cat range to be 68-90 in the next twelve months.

The S&P 500 index has now fallen 50 points or four per cent in only seven sessions. I believe we are headed lower. When the wicked witch of Wall Street haunts my Bloomberg screen, I short on strength and not buy on dips.