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Caterpillar (NYSE:CAT) Hurt by Mining Slump

Resuming Share Buyback Program


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By Swagato Chakravorty
Tuesday, April 23rd, 2013

Caterpillar Inc. (NYSE:CAT) released its earnings report Monday, and results were disappointing.

The company reported net income over Q1 fell to $880 million; a year earlier this was $1.59 billion. Sales were down to $13.2 billion from $16 billion, and revenues overall were down 17.3 percent.

CaterpillarThe company has cut 2013 revenues estimates to $57-$61 billion from earlier projections of $60-$68 billion. That means profit over 2013 is expected to be $7 a share or thereabouts, against January estimates of $7-$9 per share.

All this bad news notwithstanding, Caterpillar shares closed up 2.8 percent yesterday after statements that the company’s stock buyback program will resume, as well as word from Chairman and CEO Doug Oberhelman that the mining sector may have bottomed out and will begin to gain again in short order.

Mining Sector Sales Decline

Worldwide, mining capital expenditures have been down. In fact, an April report from JPMorgan Chase & Co. (NYSE:JPM) suggested that this would drop 20 percent over 2013. Mining majors including BHP Billiton Ltd. (NYSE:BHP) and others are reducing costs and scaling back operations in the face of anemic demand and lowered prices for metals.

Stockpiles are up and remain so, as the economies of nations from China to the U.S. remain unstable and weak. China, in fact, is the largest consumer of metals, and demand there is shaky.

However, Caterpillar did note that construction sectors in both the U.S. and China have seen a steady improvement in recent months. That offers some cause for encouragement, although mining equipment remains the company’s most profitable product area. And the mining sector has been wracked by turbulence over the past year, as a mixture of forces have led to consolidations, budgetary excesses, and slowed development.

That hasn’t kept investors happy at all. In effect, Caterpillar’s revised figures imply expectations of a decline in sales nearing 50 percent as far as conventional mining trucks and loaders are concerned, and a decline of about 15 percent in sales of Bucyrus mining draglines. Caterpillar had purchased Bucyrus back in 2010.

As Reuters reports, Caterpillar had been sending out warning signals for a while. This month alone, the company laid off 11 percent of its Decatur, Illinois workforce. And in January the company had issued a notice stating that Q1 results would likely be drastically reduced due to inventory overstocking and low demand.

However, the renewed buyback program may do much to help Caterpillar recover. Under that program, the company can buy back up to $3.7 billion in shares by the end of 2015. And the company has already stated that it intends to buy back around $1 billion over this year.

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Global Mining Slump

A closer look at their figures reveals the larger picture about mining troubles. Q1 sales’ decline features a drop in revenue from mining products prominently (down 23 percent), while construction equipment sales dropped 17 percent and gas/diesel power systems sales went down 12 percent.

In the face of such weak demand, the company was hoping for other sectors to rise to the occasion—mainly the home construction sector. However, that rise (or, really, resurgence) in demand has not happened quickly enough, leading to Caterpillar’s dismal figures this quarter.

This story is symptomatic of a wider problem sweeping the mining sector right now, as companies struggle to figure out how to deal with an abundance of stockpiled metals but plummeting demand worldwide. Most eyes are turned to Asia, since those developing nations are likely to continue demanding more and more metals.

But even their markets aren’t quite as healthy as is required to avoid these sorts of complications. And the Eurozone continues to wrestle with its own problems, while the U.S. recovery has yet to really take off.

The Telegraph quotes Oberhelman:

"What's happening in our business and in the economy overall is a mixed picture," said Mr Oberhelman. "Conditions in the world economy seem relatively stable, and we continue to expect slow growth in 2013."

Caterpillar has had greater success in its sales to resources customers—those accounted for 32 percent of all equipment sales over 2012.

 

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