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Dow-30 Earnings: Caterpillar Inc. - Second Quarter 2013
Caterpillar (CAT – Free Caterpillar Stock Report), Caterpillar, a heavy machinery manufacturer and Dow-30 component, has reported weaker-than-expected second-quarter results. Sales, at $14.62 billion, marked a 16% decline from the year-earlier total and missed our forecast of $15.20 billion. At the same time, share net came in at $1.45, well below the $2.54 logged in the prior-year interim and our estimate of $1.75. Caterpillar shares were down moderately in morning trading.
Management has reduced its full-year top- and bottom-line guidance from $57 billion-$61 billion and $7.00 per share, respectively, to $56 billion-$58 billion and $6.50. We have revised our 2013 outlook accordingly, down from $59.65 billion and $7.00 a share, respectively, to $57 billion and $6.50.
Although business in China, perhaps Caterpillar's single most important market, improved somewhat in the latest quarter, results were hampered by a number of other factors. Namely, inventory reductions at Caterpillar dealers totaling $1 billion, $1.2 billion in draw downs of the company's own stocks, and considerable currency translation and hedging losses, took a heavy toll on the bottom line.
With demand for certain commodities, including coal, iron ore, gold, and copper, still under pressure, mining activity remains subdued. Caterpillar's mining-related sales are often a bellwether of companywide results, since the sector typically accounts for about one-third of the top line and nearly half of operating income. In particular, persistently weak demand for coal, due to the ongoing shift to natural gas as a cost-competitive and ``cleaner'' alternative, continues to hurt CAT's North American operations.
While demand for heavy machinery in China has been decent, economic growth in the world's most-populous country continues to slow down. Indeed, China's economy expanded 7.5% in the June period, compared with 7.7% in the first quarter and 7.9% in the previous year. This bodes ill for Caterpillar's near-term prospects, since China represents approximately 70% of the equipment maker's international sales—although leaders in that fast-growing economic powerhouse are now suggesting they will advocate policies designed to avoid a hard landing.
Looking further out, Caterpillar expects the global economy to expand at a slow, steady rate to the end of this decade. We tend to agree, though it may take a few years until demand for mining equipment approaches more-normal levels. Our respective top- and bottom-line forecasts for 2016-2018 remain intact, at $86.17 billion and $12.75 a share. And, although this stock is an untimely selection (5: Lowest) for relative year-ahead price performance, it offers wide long-term appreciation potential and a decent dividend yield.
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.