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Dow-30 Earnings: Caterpillar Inc. - Fourth Quarter 2013
Caterpillar (CAT – Free Caterpillar Stock Report), a heavy equipment manufacturer and Dow-30 component, has reported better-than-expected fourth-quarter results. Sales regressed 10% from the year-earlier total, to $14.40 billion, while the bottom line fell 19%, to $1.54 per share. It's worth noting, however, that both figures topped our estimates and Wall Street consensus expectations. Caterpillar stock traded nicely higher on the news.
The year-over-year top-line decline was not surprising, given a spate of negative dealer sales data toward the back half of 2013. With end-user demand from mining entities still soft, Caterpillar's dealers have cut back on orders. In particular, management noted a 9% year-over-year drop in global sales during the month of December. Too, November data were even worse, with sales falling 12%. Demand has been notably weak in Asia, an engine of growth for Illinois-based Caterpillar in recent years.
The year that just ended was overshadowed by a substantial decline in sales of relatively high-margined mining products. Looking for ways to enhance operating efficiencies, Caterpillar took substantial actions to reduce costs. A lower share count also helped buffer some of the pressure on the bottom line. With the impending completion of a $7.5 billion share-repurchase initiative, the company's board of directors has approved a new authorization of $10 billion.
For 2013, sales and share profits fell 16% and 38%, respectively, to $55.65 billion and $5.75. While lackluster mining activity was significantly negative for sales and profits in the Resource Industries division, conditions within the Construction Industries and Power Systems segments stabilized during the recent year. The company's largest division, Power Systems, delivered unit profits near the 2012 record, despite lower sales.
In 2013, austerity measures enabled CAT to lower its operating costs by over $5 billion. Aggressive cost-cutting measures mitigated the impact of sluggish sales of earth-moving machinery. With demand for certain commodities, including coal, iron ore, gold, and copper, still under pressure, mining activity is liable to remain 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.
Management is looking for flattish year-over-year sales comparisons in 2014, with the measure likely rising to approximately $56 billion. Excluding restructuring actions, which are expected to reduce share net by $0.50 to $0.60 (on an after-tax basis), CAT is looking for earnings of $5.85. Moreover, CAT is seeing some signs of improvement, which should be positive for sales within the Construction Industries and Power Systems segments. Despite an expectation that global mine production will increase in 2014, industrywide spending on new equipment is apt to be depressed. As a result, sales in the Resource Industry will probably decline.
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 $72.95 billion and $10.00 a share. The stock of this blue chip, which was the second-worst performer on the Dow last year, 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.