Rising construction activity
If there is any product segment offering the potential for good news, it is construction. Although still pressured globally by European problems, sales in this category are continuing to grow in Latin America, improving in China, and accelerating in North America after a dip earlier in the year. And while CAT construction sales did record a 17% year-over-year decline in the first quarter of 2013, the segment was still the company’s best performing. Competitor Komatsu similarly cited construction strength, particularly in the U.S., in projecting a significant rise in profits for 2013.
Threats
Mining malaise continues
Mining comprises about one-third of CAT’s total sales, and the industry’s retrenchment in the face of falling commodity prices has taken a big toll. In its first quarter earnings call the company said it expects 2013 mining machinery sales to decline about 50% year-over-year, and it revised this year’s overall sales and profit guidance downward because of it. Further, recent news from Joy Global offers no reason to expect a quick rebound. That company’s second-quarter results, released in late May, noted mining sales dropped more than 8% over the same period in 2012 — marking their fifth straight quarterly decline — and Joy subsequently cut its earnings outlook for 2013 because it saw the decline continuing.
Slowdown in China
Weaker than expected economic news out of China has hit CAT in several ways. The country eased up on coal mining operations, which hurt sales of the company’s branded products as well as those it produces in several domestic joint ventures. Joy Global is also suffering, as demand for Chinese imports of commodities such as copper and iron ore weakened and impacted global production. And with construction slowing here as well, Komatsu — China’s heavy equipment sales leader — has been hurt even more than other international players and earlier this year reduced its 2013 revenue and profit guidance largely because of it.
The bottom line
Caterpillar Inc. (NYSE:CAT) remains the world leader in heavy equipment sales and is working hard to position itself for recovery in key industries. This includes cutting costs and adjusting production to meet demand, as evidenced on June 23 when it announced a layoff of unknown length for approximately 260 workers and other measures at its Milwaukee-area plants.
Overall sales have been weak since late last year, though, and through May show no signs of significant recovery. Until such evidence emerges, we remain bearish on CAT and its peers.
Howard Rothman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Howard is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article CAT on a Hot Tin Roof originally appeared on Fool.com and is written by Howard Rothman.
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