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Caterpillar (CAT Free Caterpillar Stock Report), a Dow-30 component and the world's largest manufacturer of heavy equipment, had its most challenging quarter in more than two years during the recently completed March term. In fact, first-quarter results were worse than expected, with sales of $13.21 billion falling below our $13.93 billion estimate and the year-earlier tally of $15.98 billion. Caterpillar stock was essentially flat in morning trading.

Perhaps more troubling, much of the weakness was attributable to markets that Caterpillar relies on heavily, namely China and the United States, as well as the mining industry. With production activity curtailed, CAT's March-period profit of $1.31 a share marked a material fall-off from the $2.37 reported in the previous year's comparable period, and came in below our call of $1.50.

It's been an up-an-down year for Caterpillar stock, with the equity recently down more than 25% from its 52-week high. In an effort to stem the issue's year-long slide, as well as support the bottom line, the Board of Directors has decided to resume share buybacks in the second quarter. There is $3.8 billion remaining under a $7.5 billion authorization, which was idled in 2008.

With demand for certain commodities, including coal, iron ore, gold, and copper, in question, mining activity has been cooling. This continues to be an area of concern for Caterpillar, since the mining sector accounts for roughly one-third of sales and nearly 50% of operating income (EBITDA). Lower coal production, caused by a shift toward natural gas, is weighing on the company's North American operations, in particular. This reflects the fact that U.S. coal production declined 8% in the 2013 first quarter, to approximately 240 million tons according to the U.S. Energy Information Administration. Coal and iron ore are the biggest sources of mining equipment sales for Caterpillar.

Weakness in commodities markets, across the board, is proving detrimental for Caterpillar, since miners currently have less incentive to invest in new equipment. Moreover, the company's mining business may be hard pressed to repeat growth rates reported in recent years. Notably, a dour outlook for U.S. coal has led mining global behemoths BHP Billiton and Rio Tinto to exit the industry.

Dealer statistics have shown tepid demand for heavy equipment in various end markets. Sales of Caterpillar's machinery portfolio fell 11% during the 2013 first quarter. Orders, especially in Asia, trickled in slowly. With demand for construction equipment still somewhat soft and the purchase of mining products falling in China, sales activity slowed by roughly 20% in the same period. In North America, sales volume was off by more than 10%. Despite resiliency in certain other markets, circumstances overall remain unfavorable.

Economic growth in China was approximately 7.7% during the first quarter, down from 7.9% in the year-earlier period. Conversely, market watchers had anticipated a modest year-over-year expansion in the world's most populous nation. Moreover, China's first-quarter GDP figure will likely prompt lower growth forecasts for all of 2013. This does not augur well for Caterpillar, as China accounts for roughly 70% of its international sales.

Management expects the global economy to expand at a somewhat slow, yet stable, rate. Nevertheless, Caterpillar has adjusted its outlook for the remainder of 2013, with a sales forecast between $57 billion and $61 billion, compared with a previous range of $60 billion to $68 billion. At the same time, earnings are now expected to come in toward the lower end of management's prior guidance range of $7.00-$9.00 a share. In turn, we have reduced our top- and bottom-line estimates for the year, from $63.99 billion and $8.20 a share, to $61.60 billion and $7.20, respectively. Caterpillar stock has decent total return potential, but will likely require some patience.

About The Company: Caterpillar Incorporated is the world’s largest producer of earthmoving equipment. Major global markets include road building, mining, logging, agriculture, petroleum, and general construction. Products include tractors, scrapers, graders, compactors, loaders, off-highway truck engines, and pipelayers. Also makes diesel & turbine engines and lift trucks. Foreign sales made up about 68% of the company’s total in 2012.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.