Not long ago, September 20, Caterpillar (CAT) announced a 10% decline in its global retail sales for the last three months (June-August). This is the ninth consecutive month of declining sales for the company. Regionally, Asia recorded its worst sales statistics of the year. I understand this since the Chinese economy was showing signs of a slowdown. North America was the bright spot increasing 1%. This is also understandable since it has been showing the healthiest economy on a global scale.
If we take a look at the larger picture, Caterpillar has a history of cyclical sales. During a recession from the last quarter of 2008 through spring of 2010, the company experienced negative sales growth, but this was during the recession. Mid-2012 saw a pattern of positive sales growth as demand for equipment in the emerging markets and here at home increased. But the cycle reversed itself again as inventories grew and weak economic conditions ensued led by the sluggish Chinese economy. These "cycles" can be observed in Caterpillar's quarterly reports.
Is there anything investors can learn about the global economy from Caterpillar's sales track record?
Mining Continues To Be Reflected In Its Sales Figures
Caterpillar's disappointing sales are a reflection of a struggling mining industry around the globe. The demand for mining equipment continues to drop and thus a decline in mining inventory. When the interest in large mining equipment isn't there, dealers are not going to load up on inventory and it shows in the company's projections. It believes dealers are going to reduce inventory by a total of $3.5 billion by the end of this year.
The mining and construction sectors continue to be subdued and this is expected to continue through 2014 on a global basis. Obviously different regions of the globe fare better than others. As an example, North America may not be growing very fast but is doing much better than Asia.
Global Economic Outlook
The world economy continues to struggle as it claws its way out of the 2008 global financial crisis. Certain regions of the globe are doing better than others, but even they are growing at an anemic pace.
The IMF, which reports on the global economy, reduced its forecast for global growth this year, which would put 2013 on track to extend a "flat-lining economy" for the second straight year. This year's growth is expected to be 3.1% and even the expansion of growth forecasted for 2014 only goes up to 3.7%.
In its report on global economic growth, emerging markets are expected to continue to slow as the Feds unwind the QE policy and capital returns to the American markets. I am reporting this, not to create a bleak outlook for the global economy, but to put in perspective how growth is taking place.
This affects sales of equipment for a company like Caterpillar and even a competitor-Deere & Company (DE). Realizing that the emerging markets may see slow growth in 2014 tells me that mining will continue to be sluggish and that sales for Caterpillar could also remain on the low side. It may have some growth but I wouldn't expect it to be very big.
So Where Is Caterpillar's Best Prospect For Growth?
If we are going to have growth for Caterpillar, and other competitors, where will that be around the globe in the next 18 months?
It's not hard to figure out that North America, especially United States, is going to be one of the major growth areas for Caterpillar through 2014. Although mining has struggled the first half of 2013, with heavy mining equipment shipments down 6.5%, construction and industrial equipment continue to be the bright spot. Heavy equipment orders were up (year-over-year) the first half of 2013--27.2% and 10.4% respectively.
Emerging Market Growth & Demand
With the Olympics and World Cup soon coming to Brazil, it should continue to be a good market for Caterpillar. Gross Domestic Product continues to expand better than it does in the US with a 3.3% growth in the second quarter of this year. The nation's "Growth Acceleration Program" plans to raise capital for developing ports, railroads, airports, wind farms and roads. Projected growth for 2014 is 3.2%, which is a little bit better than what is expected in the United States and Europe.
India and China are the two major developing nations of this market and each continue to show signs of growth. The problem we have here is that projected growth is not as strong as in recent years. Even though China is expected to grow by 7.7% and India by 6.3% through 2014, these numbers represent slower growth than in recent years.
Not to beat a dead horse, but we all know the Eurozone is still a challenge squeaking out a microscopic 0.3% growth rate for the second quarter of 2013. No growth of any consequence is expected through 2014.
From what I can observe today, I would say long-term prospects look good for the construction industry and to a lesser extent mining. Remember Russia became a WTO member in 2012, which will open the door for companies like Caterpillar and Deere as the nation attempts to modernize its agriculture and infrastructure. Even though the Chinese government is attempting to keep its economy at a slow steady pace, it is still focused on infrastructure spending and will continue to be a viable market.
The mining sector as well as parts of manufacturing or industrial sectors may continue to be challenged as raw material costs continue to be high. When you have rising costs in materials like steel, coal and energy, it causes concern for the growth of certain industries like mining. And these have a direct effect upon the sales of equipment that companies like Caterpillar and Deere provide. Caterpillar's sales are cyclical and I would expect the company to possibly find a bottom in 2014 and move up. I can't say when and I don't think 2014 is going to be a boom year for the company or for global economic growth. I would expect better growth beyond that time.
Author's note: all sales statistics from Caterpillar came from its quarterly reports. The information on global economic forecast throughout the article came from the IMF report, which was referenced in the article also.