Why Caterpillar Shares Probably Have Not Bottomed Out Yet

| About: Caterpillar Inc. (CAT)

Caterpillar, Inc. (NYSE:CAT) recently announced earnings and those results included some bullish comments from the CEO, who hinted that the mining sector might be at or near a bottom. A CNBC article details those comments, but also points out with good reason, as to why one analyst says a bullish call on the mining sector seems to be
premature, it states:

Despite a 10 percent decline for the stock year-to-date, for long term investors the question is whether the mining cycle has reached a bottom or whether there are still another couple of years of declines looming, said Ann Duignan, an analyst at JPMorgan,

Caterpillar's Oberhelman is more upbeat. "Our story right now is mining," he told CNBC. "It's very soft around the world. I'm thinking, I'm hoping we are at the floor on mining."

A turnaround may still be some time off, however, Duignan warned: "Mining capex picks up after mining companies start to make money, so we'd be a little bit more on the cautious side than Caterpillar with that view."

I think this analyst is right to be cautious, especially since the CEO of Caterpillar has offered guidance in the past that turned out to be overly optimistic in hindsight. In fact, earnings and revenues that were just reported, missed estimates and the company lowered guidance for the rest of 2013. The company earned $1.31 per share for the first quarter of 2013, which was a significant drop from earnings of $2.37 per share in the same quarter last year. Analysts had been expecting $1.40 per share, so this was a miss and it also fell short on revenues which came in at $13.21 billion (down from $15.98 billion in Q1 of 2012.) Caterpillar also cut earnings guidance for the full-year to about $7 per share, which is significantly below the previous range of up to $9 per share for 2013. Even with this downward revision, the current guidance might be too optimistic for a couple of reasons.

While the coal and iron ore mining sector has been under pressure for many months, the gold and silver mining sector has only recently seen a major plunge in the value of these precious metals. That means gold and silver mining companies might just be starting to cut capital expenditure budgets, and those might not start to impact Caterpillar until the second or third quarter. It seems logical that mining companies will turn more cautious after a big decline in the price of these metals.

Another big issue that has only recently surfaced is the major drop in the value of Japanese Yen. Japan's new Prime Minister, Shinzo Abe has set forth new monetary and fiscal policies that have led to a significant drop in the value of the Yen, and many analysts expect it could continue lower. In just the past several weeks, the Yen has dropped by about 8%, and this creates a major competitive advantage to Japan-based Kubota (KUB), which also makes heavy machinery. Kubota may start taking business away from Caterpillar in the coming quarters, especially if the Yen continues to fall.

When you consider the recent history of overly bullish guidance, the challenges a declining Yen will create for companies like Caterpillar, and the fact that China's economy is showing continued signs of weakness (flash PMI for April fell to 50.5 from 51.6), it seems that Caterpillar shares could have further to fall.

Here are some key points for CAT:
Current share price: $82.71
The 52 week range is $78.25 to $108.79
Earnings estimates for 2013: $7 per share
Earnings estimates for 2014: $8.93 per share
Annual dividend: $2.08 per share which yields 2.6%

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.