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Catastrophic Quarter For Caterpillar

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By: Sam Quest
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Caterpillar Inc. (CAT) is the largest heavy duty machinery manufacturer in the world. The company announced its third quarter (3Q) earnings of fiscal year (FY) 2013 on October 23, 2013.

Caterpillar reported third quarter sales of $13.4 billion, a 21% decline year-over-year (YoY). It missed estimates by almost $1.1 billion. The company’s earnings per share (EPS) of $1.45 missed estimates by $0.23. Operating income was down to $1.26 billion, a drop of almost 50% YoY, and 10% quarter-over-quarter (QoQ).

Segment Performance:

Caterpillar is segmented into three main categories, Construction Industries, Power Systems and Resource Industries. Construction Industries manufactures machinery used in infrastructure development while Power Systems manufactures machinery for power generation and Resource Industries makes equipment for mining industries.

The poor performance of the Resource Industries segment was the main cause behind the drop in Caterpillar’s sales. Dealer inventory surplus and lower end-user demand was the primary reason for the segment’s poor performance. The revenue of the other two segments also fell, but only by around 6% (QoQ) each. Each segment contributed about a third to the company’s total revenues in 2012.

Regional Performance:

The company’s performance fell in every geographical segment YoY. Asia/Pacific was down the most; it fell 32% from $4.2 billion in 3QFY12 to $2.9 billion in 3QFY13.

Slowing growth and investments in the emerging markets, uncertainty surrounding the US government’s monetary and fiscal policies, and a sluggish European economy primarily led to the revenue decline.

Caterpillar reduced its inventories 23.7% YoY from $17.5 billion to $13.4 billion, and approximately 3.5% QoQ. The company has not yet released its figures on backlogs and book-to-bill units.

Caterpillar’s dealer statistics, an indication of retail sales provided by independently owned dealers, showed a 9% decline in overall sales on a rolling three-month basis. The Asia/Pacific region dropped the most (24%), followed by Europe, Africa and Middle East (EAME) (11%) and Latin America (10%). North America was the only region which grew, but by just 4%.

The company has so far repurchased $2 billion in stock this year. It raised its quarterly dividends by approximately 15% YoY to $0.60 per share, from $0.52 per share in 3QFY12.

Guidance:

Caterpillar lowered its sales outlook for FY13 by $2 billion to about $55 billion, which would negatively impact EPS by about $1. The company now expects to earn about $5.5 per share.

Company management did not provide an outlook on sales and profits for 2014. It expects conditions to remain flat in 2014 though.

Estimates:

Outlook:

The outlook of Bidness Etc on Caterpillar remains bearish. Although the company had a record year in 2012 in terms of revenues, we do not expect the company to reach the same level in the near future.

All three of the company’s segments are down YoY and the demand forecast remains weak. The company is forecasting a flat 2014, relative to the current performance. Bidness Etc believes that once dealer inventories reach equilibrium, Caterpillar will see an uptick in sales. However, we see weakness in the Resource Industries segment, based on miners’ capital expenditure forecasts. While some miners are producing at record levels, currently it is not resulting in sales for Caterpillar.

This is due to a fall in average prices of coal and copper since the start of 2011, which caused coal and copper companies to reduce investment in future projects, lowering demand for Caterpillar’s mining machinery. Moreover, the Federal Reserve’s data shows US mining and utility companies are operating at well under full capacity. The companies have room to ramp up production before they need to expand production capacity, so they are not likely to buy more of Caterpillar’s machinery soon.

Global industrial capacity utilization stood at 78.1% at the end of September 2013.

While residential construction spending in the US has been rising, non-residential construction, where the company has a larger exposure, is down YoY for all three quarters in 2013.

US has been growing at a slow pace while Europe continues to struggle. China and the rest of the emerging markets are all showing signs of slowing down. We believe that Caterpillar will face further pressure in the near term.

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