Caterpillar's Monthly Sales Slip, May Records 12% Fall

Caterpillar, Inc. (NYSE:CAT) global retail sales for three-month period ending May 2016 plunged 12%. Nevertheless, the share price gained a nominal 0.6% as sales growth, despite remaining in the negative territory, was flat with April. This raised hopes that the rate of decline was decelerating.

A prolonged global slowdown in the mining sector continues to pin down the world’s largest manufacturer of mining and construction equipment. Caterpillar's sales growth has been in the red for an unprecedented stretch of 42 consecutive months. This current phase is much longer than the 19-month long stretch spanning from Oct 2008 to Apr 2010 wherein the company had suffered the same fate due to recession.

So far in 2016, the company’s sales have dropped an average14.6%. After dropping 21% in February, to its lowest in 2016, the company witnessed a slight improvement with the 13% decline in March. The decline remained steady in April and May.

As per the company’s May 2016 sales report, overall performance was dragged down by a 31% slump in Latin America. Sales fell 13% in the Asia Pacific region, 12% in North America, and 4% in the Europe, Africa and Middle East (EAME).

Overall sales at Resource Industries, which continues to bear the brunt of weak mining spending due to lower commodity prices, were down 27%. Asia-Pacific sales witnessed the maximum decline of 48%, followed by a 23% drop in Latin America, 22% drop in EAME and 20% in North America.

Sales in Construction Industries were down 8% year over year, mainly hit by the slump in Latin America (35%). Sales in North America were down 11%. On the contrary, the Asia-Pacific regions recorded an increase of 2%.

Sales in the Energy & Transportation segment fell 30% mainly due to a 41% plunge in the Oil & Gas sector. Sales in the Transportation sector declined 33% followed by the 19% decrease in the Power Generation sector. The Industrial sector also declined 15%.

The slowdown in China has sucked the mining machinery industry into its vortex. China accounts for approximately one half of the demand for the world's metals. The mining industry has been hit hard with miners cutting down on expenditure in the wake of lower commodities prices. The bearish phase of the mining market is a blow to Caterpillar’s long-term objective of becoming a dominant global player in the mining space.

Caterpillar’s first-quarter 2016 adjusted earnings plunged 68% to 67 cents per share. At the end of the quarter, Caterpillar’s backlog remained unchanged at $13.1 billion. On a year-over-year basis, order backlog declined by about $3.5 billion, having recorded decreases in all segments. Due to consistently challenging conditions in 2016, Caterpillar now expects revenues in the range of $40–$42 billion, and earnings per share of $3.70.

To stay profitable despite weak demand, Caterpillar has stepped up its restructuring actions, which should lead to cost savings. The company also continues to invest substantially in R&D. However, the slump in oil prices, weak mining, Chinese economy woes, declining backlog, and softness in the agriculture sector remain major headwinds ahead of the company.

Caterpillar currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the sector include Astec Industries, Inc. (NASDAQ:ASTE) , H&E Equipment Services Inc. (NASDAQ:HEES) and Alamo Group, Inc. (NYSE:ALG) . While Astec Industries sports a Zacks Rank #1 (Strong Buy), H&E Equipment Services and Alamo Group carry a Zacks Rank #2 (Buy).

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