For a long time, Caterpillar Inc. (NYSE:CAT) was synonymous with stability, growth and durability. One of the hallmarks of American heavy industry, the company has been around for decades, and most of the time, it has managed to perform admirably. However, the numbers the company has been putting out recently are far from encouraging. After a sizable miss in the last quarter of 2012, the company has again failed to meet analyst expectations. What’s going on?
The Numbers
Revenue for the quarter paints a similar picture. The company reported sales of $13.21 billion, down from nearly $16 billion a year ago and missing the consensus by around half a billion dollars. On the back of these figures, the company drastically lowered its guidance for full-year 2013, now expecting sales of $57 billion-$61 billion versus its earlier estimate of $60 billion-$68 billion. EPS is expected to come in at $7.00 per share, the low end of the previously given range.
The Story
According to the company’s management, much of the sales weakness for the period was due to changes in dealerships’ new equipment inventory. As dealers were anticipating an increase in demand during the first quarter of last year, they spent some $875 million on expanding their inventories. Now, as demand seems to be declining again, they have reduced their inventories by around $700 million.
In a word, the problems center on mining, or the company’s Resource Industries segment. Demand for mining machinery has been severely depressed throughout the quarter, as miners have substantially scaled back their capital expenditures. The revised outlook now expects a 50% decline in Caterpillar Inc. (NYSE:CAT) mining machinery worldwide, which accounts for the bulk of the downside revision. As a result, the company is putting a lot of effort into realigning its production and capital expenditures with shifting demand.
Market conditions have been particularly tough on miners recently, with BHP Billiton Limited (ADR) (NYSE:BHP) undertaking a number of measures to cut costs in the face of macro-economic uncertainty. As metal prices have dropped, so have corporate profits and share prices as a result. BHP’s new CEO has taken a pay cut, remarking that his focus remained on slashing costs and improving operations.
Vale SA (ADR) (NYSE:VALE), another global mining giant, has also been under severe pressure. Annual EPS was almost halved in 2012 as the company struggled with volatile metal prices and its tax battle with the Brazilian government. Despite the broader market rally, most major miners are down for the year, Vale SA (ADR) (NYSE:VALE) dropping some 24% and BHP Billiton Limited (ADR) (NYSE:BHP) down over 18%.
Valuations and Metrics
Caterpillar Inc. (NYSE:CAT) stock rose slightly following the release, suggesting that the market has already priced in much of this earnings weakness. Caterpillar was the worst performer among the Dow Industrials this year, which has left it trading at a discount.
The stock trades at only 9.48 times trailing earnings, and around 9 times forward earnings. The price-to-sales is low at 0.8, whereas the return on equity is excellent at almost 37%. The operating margin of 13% is well over the industry average. For those who are bullish on the stock long-term, the recent weakness may prove an enticing entry point.
The Bottom Line
Caterpillar Inc. (NYSE:CAT) has again delivered a quarter of disappointing numbers, and slashed its 2013 outlook to boot. Much of this is due to weakness in the global mining sector, which has been under pressure as metal prices have fallen. Yet the news did not cause the stock to dip, which suggests that this weakness may have already been priced in.
Caterpillar remains a very strong company, and bullish investors may pounce on this opportunity to pick up a very big name at bargain prices.
The article More Earnings Weakness from Caterpillar originally appeared on Fool.com and is written by Daniel James.
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