Caterpillar Inc: Riding Out The Trough

Caterpillar Inc. (CAT), maker of big boys’ toys and heartthrob of the US industrial market, announced disappointing but not unexpected first quarter earnings this week, down 45% in the first quarter, while cutting its full-year 2013 sales estimate by 8%.


“Not unexpected?” I hear you say, “that’s a whopping drop in earnings to be so sanguine about!” Well yes, it is, but Caterpillar is often the topic of watercooler conversation here at MetalMiner, and it’s no secret that Caterpillar saw the downturn in commodity prices and mining activity long ago and have been positioning themselves accordingly.

The firm announced layoffs last year and have announced more recently; Cat also made a major drive to shift inventory in Q4 and Q1 to run leaner coming into the downturn, a strategy that contributed to the first quarter sales results down 18% year-on-year, but has positioned them for a lean 2013 carrying less stock.

The firm’s share price and revenue have reflected the state of the commodities markets more closely than the S&P in general.

Caterpillar has faced headwinds in two main areas.

Firstly, and most acutely, in the mining sector, which accounts for roughly a third of Caterpillar’s sales, according to the FT. As Glencore/Xstrata chief Ivan Glasenberg is quoted as saying: “It’s time to stop building (new mines).” The “Big Four” miners – Xstrata, Anglo American, BHP Billiton and Rio Tinto – spent almost $50 billion on capex last year; but only $35 billion is expected for 2014.

Doug Oberhelman, Cat’s chief executive, is quoted in another report as saying that while expectations for the company’s construction and power systems segments remained constant, “our expectations for mining have decreased significantly,” reflecting a sales decline of about 50% from the previous year for Caterpillar mining machines.

Meanwhile, Brad Halverson, chief financial officer of the firm, added, “Almost the entire decline of $7bn [in sales for the full year] is mining.” Revenues were hit by an 11% decrease in global retail machine sales during the quarter, led by an 11% drop in North America and a 24% fall in Asia Pacific. Sales of mining, construction and power systems equipment fell 23%, 17% and 12% year on year, respectively.

But is Caterpillar alone in this? And will Chinese growth roar back?

by Stuart Burns