Caterpillar Inc. (NYSE: CAT) is an American corporation that designs, manufactures and sells construction and mining equipment, natural gas engines, industrial gas turbines and diesel-electric locomotives worldwide. The economic and mining slowdown has had a negative effect on Caterpillar's growth. This decline has also severely hit profits and is the primary reason behind a significant decline in its first quarter profits.
CAT reported revenues of $13.21 billion in the first quarter of 2013, down from $15.98 billion a year earlier. Its earnings per share shrank 45% from $2.37 to $1.31, in the first quarter of 2012; it has failed to meet the analyst's EPS estimate of $1.40. Due to the downturn in the economy it has lowered its 2013 sales outlook to $57 billion from $61 billion.
These unfortunate results are due to a decrease in the demand of mining equipment and low prices for mined commodities, such as iron ore. The mining equipment business plunged 23% while Construction equipment sales fell 17%, and gas and power systems sales declined 12% in the first quarter of 2013. The company plans to buyback $3.7 billion of its shares before the repurchase approval expires in December 2015 which was approved in 2007. North America is the largest geographic market for CAT. In the month of May, its sales from this region declined 16% year-over-year while this figure was 18% and 11% in the month of April and March respectively. CAT increased its quarterly dividend by 15% i.e. from 52 cents to 60 cents per share.
Weak mining industry
Mining companies like BHP Billiton Limited, Vale and Rio Tinto, have reduced their spending on mining extraction due to weak global demand and their focus on cost control that has negatively impacted Caterpillar. The mining business generated one-third of CAT's sales in 2012. Additionally, CAT's sales were impacted by a decline in dealer inventories. CAT dealers reduced their inventory level for end users because of the weak demand. Therefore, CAT also had to reduce its inventory level by $700 million in the first quarter of 2013.
In April, Caterpillar announced a cut of 300 jobs in South Milwaukee and 1,400 jobs in Belgium due to rising costs and decline in core construction and mining business. However, it is not the only one that is facing a decline in the mining business, but its competitors Joy Global, Inc. (NYSE: JOY) and Komatsu Ltd. (OTCPK:KMTUY) are faced with the same situation. Komatsu is the second largest manufacturer of construction equipment and mining equipment. For the year ended March 2013, Komatsu faces a huge decline in its top and bottom line. Total revenue decreased by 17% to $20.016 billion year over year while net income dipped to $1.34 billion, down from $2.03 billion a year earlier. In January 2013, Komatsu cut its profit forecast for the FY2013 by 12% to 230 billion yen ($2.5 billion) due to slow demand for mining equipment in Indonesia and declines in the coal prices.
Joy Global, a Milwaukee-based mining equipment services company also announced last October to cut 250 jobs due to the slackening pace in business. In the first quarter ended January 2013, Joy Global reported a 25% decline in orders over the year while this figure was 5% and 25% in the previous two quarters. In the second quarter ended April 2013, Joy Global sales were $1.4 billion down from $1.5 billion a year ago, and operating income was $279 million down from $333 million a year ago.
The Yen is weakening against the dollar, but this may have a positive impact on Caterpillar. The company has a sizeable manufacturing presence in Japan, and some of its products are sold in Japan, so a weaker yen provides a cost benefit to the company. Despite that, the price war will continue with Komatsu, which is also a Japan based equipment manufacturer.
Caterpillar is facing challenges due to a weak demand in mining equipment and the weakness of commodity prices. This year will be difficult for the company, and the future rebounding of the mining market and stabilization of commodity prices will only benefit Caterpillar. Growth seems unlikely this year. Due to a high Forward P/E ratio of 10.3x, declining revenues and slow industrial growth, investors should stay away from CAT.
Additional disclosure: Equity Whisper is a team of analysts. This article was written by our industrials analyst. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.